From Higher Grocery Prices to Higher Gas Prices: A Rise in Inflation for the U.K.

Do you ever see family members or friends getting annoyed that gas prices have risen by 40 cents per gallon, or maybe you have noticed that the restaurants you go to slowly increase their prices over time? A frustrating experience of life, inflation is the rise of goods and services in an economy over a period of time. It is something that is global, and right now the U.K. is experiencing some of its highest inflation rates since January of last year. 

What Prices are Rising and Why?

Currently, the inflation rate in the U.K. is about 3.6%, which is much higher than the Bank of England’s target rate of 2%. As inflation is almost double the expected percentage, there are certain goods and services that are being hit hard by price rises. For the people of the U.K., this is grocery, retail, and fuel products. 

Fig. 1. Inflation rate in the U.K. and its changes in the past five years; Hooker, Lucy. “UK Inflation Hits Highest Rate for Almost a Year and a Half.” BBC, 16 July 2025, www.bbc.com/news/articles/c3en2enpy7po.

Grocery and retail are hospitality and labor-based industries. They depend on employees to interact with customers and sell products. Typically, when paying workers, businesses consider wages as an input to production and they are thus a part of production costs. Recently, the U.K. has established higher minimum wages. Before April of this year, the minimum wage for workers over the age of 21 was £11.44 per hour; now the wage is £12.21 per hour. While this may not seem like a big difference, there are millions of workers in the U.K. that are paid minimum wage. For businesses, this will add up quickly and their production costs will increase significantly. When production costs rise, suppliers or businesses have to raise the price of the products and goods that they sell to compensate for the increase in money they spend to produce said goods. This can be clearly seen in the grocery sector of the U.K.’s economy as grocery prices have risen by 5.2% in the past few months. 

Moreover, fuel, such as gas, and electricity is getting pricier and pricier for the people of the United Kingdom. Natural gas is what generates electricity in the U.K., and there are companies to manage these resources. One of them is Ofgem, the Office of Gas and Electricity Markets, and they are the main government regulator for electricity and gas markets in Great Britain. Recently, Ofgem raised its price cap on energy bills by 6.4%. A cap on energy bills is a regulatory tool that limits the maximum amount that energy suppliers can charge households for each unit of energy they consume. Hence, if the price cap increases, then Ofgem can charge households a larger gas bill and/or electricity bill. The recent price cap raise will increase the average household cost on electricity and gas bills by £111. 

Why is gas and electricity becoming pricier in the U.K.? Ofgem is stating that wholesale prices of gas are getting more expensive, and they are raising price caps to compensate for the increase in costs that they are experiencing. Wholesale prices of gas in Great Britain are increasing for multiple reasons, and one of them is because of the Russo-Ukrainian War. The U.K. is a major importer of gas, and before the invasion of Ukraine in 2022, Russia was one of the U.K.’s largest suppliers. However, since the U.K. does not support the actions of Russia, the U.K. has made efforts to become less dependent on Russian gas and Russia itself has closed off all major gas pipelines to Europe. 

To make up for the decrease in gas supply from Russia, the U.K. is now depending on importing Liquified Natural Gas (LNG) from countries such as the U.S. and Qatar. LNG is generally more expensive, and to make matters even worse, the world is experiencing an increased demand for LNG globally. In the past few years, Asian and South American countries have begun to buy more quantities of LNG as they want to transition from coal-powered electricity sources to gas-powered electricity sources. As there is more competition and demand for LNG, it is getting more expensive. All of these reasons combined are causing U.K. wholesale gas prices to rise, and this is directly affecting residents of Great Britain by raising prices and increasing inflation. 

Fig. 2. The rise in wholesale gas prices in the U.K.; “Energy UK Explains - April 2025 Price Cap Rise  - Energy UK.” Energy UK, 21 Feb. 2025, www.energy-uk.org.uk/publications/energy-uk-explains-april-2025-price-cap-rise/.

How is the Government Planning to Fix the Problem? 

As the rate of inflation is much higher than what the U.K. deems to be an acceptable and healthy amount, the government has to take actions to lower prices. To fix high inflation rates, governments generally try to slow down economic growth. There are multiple ways to go about this, but the U.K. is going to increase borrowing to discourage spending. 

Usually, increasing government borrowing and hence increasing the demand for loans in the loanable funds market increases the interest rate of an economy. When interest rates are higher, individuals and businesses are less likely to borrow and spend money as it becomes more expensive to borrow. For example, if the interest rate on your credit card gets higher, you’ll probably want to spend less on your credit card because you will be paying higher interest payments. Additionally, higher interest rates also provide the incentive to save more. If you have money in a savings account that has a variable interest rate and interest rates get higher, then the money in your account will gain more value. With all of this in mind, there will be less activity and investment in the U.K.’s economy and therefore less demand and competition. This will bring down the GDP and inflation. 

Fig. 3. An increased demand for loanable funds by the government and how that affects interest rates; “AP Macro: Crowding Out.” Tamoclass, 7 Mar. 2014, tamoclass.wordpress.com/2014/03/07/ap-macro-crowding-out/.

Additionally, it is expected that the Chancellor of the Exchequer, the chief financial minister of the U.K., Rachel Reeves will raise taxes this year to lower inflation. This is another way to slow down the economy and bring down inflation rates. When people are taxed higher amounts, they have less spending power and are not as active in the economic market. Individuals and businesses do not consume as many goods and services because they do not have the financial resources. Like raising interest rates, this brings down GDP and hence brings down inflation and price level. 

Fig. 4. How a decrease in demand affects price level and GDP; GPB. “Econ Express Macroeconomics | Concept 28: Aggregate Supply and Demand.” Georgia Public Broadcasting, 2023, www.gpb.org/education/econ-express/aggregate-supply-demand.

While all of these practices are common and regular, they will bring opposition and complaints from U.K. residents. Raising taxes and interest rates are economic actions that most people dislike. No one enjoys giving a bigger portion of their income to their government or spending more money on credit card bills and mortgages. However, these actions are necessary if the U.K. hopes to bring down its inflation and make goods and services more affordable for the public. 

Bibliography

“AP Macro: Crowding Out.” Tamoclass, 7 Mar. 2014, tamoclass.wordpress.com/2014/03/07/ap-macro-crowding-out/.

BBC. “UK Inflation Rate: How Quickly Are Prices Rising?” BBC, 14 Jan. 2025, www.bbc.com/news/articles/c17rgd8e9gjo.

“Energy UK Explains - April 2025 Price Cap Rise  - Energy UK.” Energy UK, 21 Feb. 2025, www.energy-uk.org.uk/publications/energy-uk-explains-april-2025-price-cap-rise/.

GPB. “Econ Express Macroeconomics | Concept 28: Aggregate Supply and Demand.” Georgia Public Broadcasting, 2023, www.gpb.org/education/econ-express/aggregate-supply-demand.

Hooker, Lucy. “UK Inflation Hits Highest Rate for Almost a Year and a Half.” BBC, 16 July 2025, www.bbc.com/news/articles/c3en2enpy7po.

McEvoy, Finn. “Why Has UK Inflation Risen? - Economics Observatory.” Economics Observatory, 21 May 2025, www.economicsobservatory.com/why-has-uk-inflation-risen.

OFGEM. “Energy Price Cap.” Ofgem, 2025, www.ofgem.gov.uk/energy-price-cap.

ONS. “The Impact of Higher Energy Costs on UK Businesses.” Ons.gov.uk, Office for National Statistics, 18 May 2025, www.ons.gov.uk/economy/economicoutputandproductivity/output/articles/theimpactofhigherenergycostsonukbusinesses/2021to2024.

Scholfield, Will. “Why Are Gas Prices so High in the UK?” BOXT, 2022, www.boxt.co.uk/boilers/guides/why-are-gas-prices-so-high.

Schomberg, William. “UK Borrows More as Inflation Adds to Debt Bill, and Reeves’ Headache.” Reuters, 22 July 2025, www.reuters.com/world/uk/uk-borrows-more-inflation-adds-debt-bill-reeves-headache-2025-07-22/.

Young, Sarah. “UK Grocery Inflation Jumps to 5.2% in Four Weeks to July 13, Worldpanel Says.” Reuters, 22 July 2025, www.reuters.com/business/retail-consumer/uk-grocery-inflation-jumps-52-four-weeks-july-13-worldpanel-says-2025-07-22/.

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“UK Inflation and CPI Have Beaten Expectations, so Why Are People Worried?” Private Banker International, 16 June 2021, www.privatebankerinternational.com/news/uk-inflation-cpi-2021/.