Inflation hit 2.9% in July - but electricity bills are getting cheaper in October
Yesterday morning brought the kind of news that confirms what most households already knew: inflation rose to 2.9% in July, its highest level in four months, driven almost entirely by the 13% energy cap rise that landed on 1 July. It was not a surprise. The energy bills went up, prices followed, and the numbers confirmed it.
But there is a second story sitting alongside yesterday's figures that has been rather overshadowed, and it is considerably more welcome. VAT on household electricity bills is being cut from 5% to 0% from 1 October 2026, saving the average household around £45 a year. It lands on the same day as the next Ofgem price cap update, and while it will not reverse every cost pressure households are facing this winter, it is a meaningful step in the right direction at exactly the right time of year.
Here is what the July inflation figure actually means, what the October electricity VAT cut does, and what the picture looks like heading into autumn.
What drove UK inflation to 2.9% in July 2026?
The acceleration in annual consumer price growth from June's 2.6% to July's 2.9% was triggered by the 13% jump in the regulated cap on household energy prices that took effect on 1 July. The typical annual gas and electricity bill rose by £221 to £1,862 following the cap change, with gas prices surging 14.7% in the year to July, the largest annual increase since October 2022.
Beyond energy, rents rose 4.1% in the year to July, car insurance was up 8.4% and mobile phone services climbed 9%. Core inflation, which strips out energy and food, held steady at 2.6%, unchanged from June and slightly above the 2.5% analysts had expected.
Joe Nellis, head of economic research at MHA, warned that the rise was moving inflation back in the wrong direction and that rising prices disproportionately affect lower-income households. The Bank of England currently expects inflation to peak at around 3.2% in the final quarter of 2026
What does 2.9% inflation mean for your household?
Inflation at 2.9% means prices in July were, on average, 2.9% higher than a year ago. That average covers everything from energy and rent to food, petrol and services, and for households spending a significant share of income on energy, the personal impact will feel considerably higher than the headline figure.
The next inflation reading, covering August, is published on 17 September. That figure will capture a full month of the higher energy cap and will give a clearer picture of whether the July rise is a temporary spike or the beginning of a sustained upward move through the autumn.
How much will the electricity VAT cut save households from October 2026?
Prime Minister Andy Burnham announced on his second day in office that VAT on household electricity bills will be cut from 5% to 0% from 1 October 2026, saving the average household around £45 a year. The measure applies across England, Wales and Scotland and is expected to stay in place until the end of the financial year in March 2027.
The change happens automatically. You do not need to apply, contact your supplier or change your tariff. Every eligible household will see the reduction reflected in their electricity bills from October onwards.
British Gas has confirmed it will automatically apply the reduction to all eligible household electricity customers from 1 October 2026. Other major suppliers are expected to follow. Prepayment meter customers are included and will see the reduction applied automatically to their meter, though it is worth confirming this with your supplier in September if you want to check.
One important note: the VAT cut applies to electricity only, not gas. Your gas bill is unaffected by this particular measure.
Northern Ireland is excluded from the VAT reduction due to complications related to its Brexit arrangements. Households in Northern Ireland will not see their electricity bills change as a result of this policy.
What is the Ofgem October 2026 energy price cap prediction?
Ofgem is expected to announce the October to December 2026 energy price cap on 26 August 2026, six days from today. Some supplier predictions suggest the cap could rise a further 5% from October.
If that prediction is correct, the VAT cut on electricity would partially offset the cap rise rather than fully reverse it. The net impact on any individual household depends on how much electricity they use relative to gas, what tariff they are on, and whether they are on a fixed deal.
The most useful thing anyone on a standard variable tariff can do between now and 26 August is compare fixed deals. If the October cap rises as some are predicting, some fixed tariffs currently available may come in below the new variable rate. Comparing now rather than after the announcement means you are making decisions before the market reprices. Use one of Ofgem's accredited comparison services at ofgem.gov.uk to check the whole market by postcode.
What do July inflation and the October VAT cut mean for winter bills?
Taking both pieces of news together, the picture heading into winter looks like this. July's inflation rise was driven by energy, confirming that the cap increase is feeding through to household costs exactly as expected. October brings both a potential further cap rise and a VAT cut on electricity that will partially offset it for most households.
Andy Burnham said the VAT cut was designed to give households breathing space, with the government taking immediate action to cut taxes on energy bills and put more money in people's pockets. Whether it feels like breathing space will depend heavily on where the October cap lands and how cold the winter turns out to be.
What is clear is that the direction of travel from the new government is toward reducing energy costs, not adding to them. The Ofgem announcement next Tuesday will give a much clearer picture of what October actually means for household bills, and thinkmoney will cover it as soon as the figures are confirmed.
What to do about your energy bills before the October price cap announcement
If your energy bills went up in July and you have not yet reviewed your tariff, this week is worth using. The Ofgem cap announcement lands on Tuesday 26 August and the market will move quickly in response.
If costs are genuinely becoming difficult to manage, free help is available from MoneyWellness at moneywellness.com, National Debtline on 0808 808 4000 and Citizens Advice on 0800 144 8848. Your energy supplier is also legally required to offer a manageable repayment arrangement if you are in debt to them, and getting in touch before arrears build is always better than waiting.
Key energy bill dates: August, September and October 2026
26 August 2026: Ofgem announces October to December energy price cap
1 October 2026: VAT on electricity bills falls from 5% to 0% for all eligible households in England, Wales and Scotland
17 September 2026: ONS publishes August 2026 CPI inflation figures
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