The UK’s Inflation Uptick Is a Non-Mystery

Some mysteries are so complex they require a corkboard, 20 yards of string and a 10-part detective series. And some are so simple, they stare everyone in the face and somehow go completely unnoticed. UK inflation, and the purported mystery of why it is so high, is an example of the latter—and a prime example of sentiment toward UK stocks being too dour.

To much attention, UK inflation accelerated to 3.8% y/y in July, making it an increasingly visible outlier from the rest of the Western world. If you saw any coverage, you probably saw a chart like Exhibit 1.

Exhibit 1: The UK’s Outlying Inflation Rate

Source: FactSet, as of 8/21/2025. Monthly CPI and HICP inflation rates, January 2021 – July 2025 except for Australia, which runs through June 2025.

Inevitably, when economic coverage plays a game of one of these things is not like the other, there is a scramble to determine why. For UK inflation, the consensus generally landed on food, concluding grocery stores are raising prices to offset higher employer taxes. (Some bizarrely even blamed Brexit!) This, supposedly, is the latest evidence April’s tax rises are starting to bite.

If you look only at the breakdown of UK CPI, this might seem true. But for this to be the reason UK prices are an outlier, then the UK would need to be the only place food is getting more pricey. It isn’t. Meat prices are up globally, much to the chagrin of those of us who enjoy a good bacon burger. When Canada’s inflation came out earlier this week, the gripe was sky-high grape prices. Turns out the food market is pretty global, making growing and ranching conditions a factor to food prices globally. UK tax hikes didn’t cause US beef prices to jump over 11% y/y.^[i]

So what did cause UK prices’ divergence? Looks to us like the household energy price cap had a lot to do with it. Electricity prices’ year-over-year inflation rate was faster there. Even though the price cap fell in July versus the prior three months, it was much higher than the prior year, sending household energy prices up 9.2% y/y.^[ii] That is a big acceleration from June’s 6.8% y/y and several percentage points higher than the US, eurozone (where electricity was flat), Canada and Australia (where electricity fell rapidly).^[iii]

We think this is rather bullish for UK stocks. When everyone mistakes a global trend (food) for a local problem, it illustrates outsized negative sentiment. Meanwhile, the UK-specific culprit here—side effects from a misguided price cap that both main parties pushed and didn’t cap prices—is an old and very well-known issue. When modest negatives like this are so well known, it defangs their market impact even as they pinch households. We aren’t calling it good, but it is a silver lining for investors and one that adds up to things not being as bad as feared.

If everyone says the tax hike caused faster inflation, but the real culprit is another policy whose effects everyone already knows, we think that qualifies as reality beating expectations. That is generally all stocks need to keep climbing the wall of worry.