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UK inflation raced up to 3.8% in July - the fastest rate among advanced economies. The spike dragged the FTSE 250 lower, while the FTSE 100 held steady thanks to gains from consumer and healthcare stocks outshining drops in energy and mining.

What does this mean?

This stubborn run of UK inflation marks the highest since early 2024, reigniting concerns about persistent price pressures. Services led the charge, prompting the Bank of England to reconsider its path for interest rates. Traders now expect the next rate cut could be pushed out from late 2025 to as far as March 2026. The BoE faces a tough balancing act between taming inflation and supporting growth, reflected in moves across UK markets: the FTSE 100 got a lift from resilient consumer and healthcare names, while the FTSE 250 slipped 0.4% as smaller, domestically focused companies felt the pinch. The pound rose on expectations that rates will stay higher, even as sectors like homebuilders, energy, and mining faced fresh headwinds - not helped by BP's refinery disruptions in the US.

Consumer and healthcare stocks helped keep the FTSE 100 afloat, but energy, mining, and homebuilder shares took a hit from rising costs and policy uncertainty. Investors are now bracing for interest rates to stay higher for longer, with cuts not expected before March 2026. That strengthens the pound but piles more pressure on sectors most exposed to UK borrowing costs.

The bigger picture: The UK's persistent price puzzle.

UK inflation is running hotter than in Europe or the US, making policymakers cautious about loosening their grip. Higher borrowing costs are starting to squeeze growth-sensitive sectors, from homebuilders grappling with affordability to exporters navigating a stronger currency. Until inflation cools decisively, expect the Bank of England to stay cautious and market swings to persist.