UK inflation fell to 2.6 per cent in June, the lowest rate in 15 months as households benefitted from food and fuel prices dropping in an early boost to the cost-of-living-focused Andy Burnham.
The rate of Consumer Prices Index (CPI) came down from 2.8 per cent in May, according to the Office for National Statistics (ONS), the lowest level since March 2025 – and also below the 2.7 per cent rate that most economists had been expecting.
Despite the boost, analysts are still, for the most part, expecting this to be a short-lived relief, with further inflation rises predicted to filter through as the year goes on – and particularly if the Iran war continues to rumble on, with the price of oil up 20 per cent over the past month, sitting above $93 on Wednesday.
In addition, the uplift in energy price cap applies from July, while Matt Swannell, chief economic adviser to forecasting organisation ITEM Club, suggested Andy Burnham’s removal of VAT from energy bills – which starts in October – will be “more than offset by the impact of higher wholesale energy costs”.
Even so, the lower-than-expected CPI rate is set to provide some relief to new prime minister Mr Burnham, who has made efforts to ease the cost of living a top priority.
According to the ONS, the biggest downward pull on overall inflation last month came from transport, food and non-alcoholic drinks.
Average petrol prices declined by 2.1p per litre between May and June, while diesel prices dropped by 10.7p per litre.
This marked the first time petrol had eased since the start of the Middle East conflict at the end of February, which sent oil and gas prices soaring and pushed up prices at the pumps.
However, while prices were lower month-on-month, overall motor fuel prices remained 21.3 per cent higher in the year to June in a sign that the conflict has driven up the cost of living in the UK.
Food and non-alcoholic drink prices fell by 0.2 per cent between May and June, bringing the annual inflation rate down to 1.7 per cent, from 2.2 per cent in May.
ONS chief economist Grant Fitzner said: “A fall in motor fuel prices, particularly diesel, helped ease inflation in June.
“Food prices fell this month, driven by products including chocolate, margarine and beef.
“Clothing prices also fell with the start of summer sales, with bigger discounts than last year.
“The cost of raw materials dipped for the first time since January, mainly due to the lower price of crude oil, while the increase in the costs of goods leaving factories slowed again.”
Newly appointed Chancellor John Healey said: “Falling inflation is news families want to hear but there is much more to do to give people the breathing space they need.
“That is why yesterday we cut VAT on electricity bills and today we’re announcing a £2 cap on bus fares from January.
“We have chosen to focus on the cost of living in our first week, signalling that concern for working people will be at the heart of everything we do.
“Both these changes are a win-win. They help keep inflation down while helping people afford the essentials.”
Mr Burnham and Mr Healey announced on Tuesday that electricity bills will be VAT-free from 1 October, saving households about £45 a year.
Cutting VAT from 5 per cent to 0 per cent is estimated to reduce CPI inflation by around 0.1 percentage points when it comes into effect, according to the government.
Looking further into the ONS data, Susannah Streeter, chief investment strategist at Wealth Club, noted that pressure to raise interest rates would remain – though the Bank of England are not expected to do that next week.
“Core CPI, which strips out volatile food and fuel prices and is monitored closely by the Bank of England, also came in at 2.6 per cent. Price rises for goods have slowed quite markedly, but services inflation is proving stickier, falling only a little to 2.6 per cent, above expectations,” Ms Streeter said.
“While the fall in the headline rate is welcome news, stubbornly high core inflation, a sluggish economy and the Middle East crisis are set to keep Bank of England policymakers on alert. However, it still looks likely they’ll adopt another wait-and-see stance at the meeting later this month, with an interest rate hike not fully priced in until close to the end of the year.”
James Bentley, director at Financial Markets Online, agreed and said a decision not to raise rates would be a “huge relief for the 1.8 million homeowners who are or were due to remortgage this year”, while Chris Beauchamp, chief market analyst at IG, pointed out there was “little point rushing to raise rates if doing so will pile on the pressure on the employment picture.”
Additional reporting by PA
