UK inflation fell to the lowest rate in 15 months in June as a drop in fuel and food prices helped bring down the overall cost of living. The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation was 2.6% in June, down from 2.8% in May and the lowest level since March 2025.
What drove the drop in inflation?
The biggest downward pull on overall inflation last month came from transport, particularly motor fuel. Average petrol prices declined by 2.1p per litre between May and June, while diesel prices dropped by 10.7p per litre. This was the first time that petrol prices have eased since the start of the US-Israel war with Iran at the end of February.
Another driver of lower inflation last month was food and soft drink prices, which fell by 0.2% between May and June, while the annual rate dropped to its lowest in nearly two years at 1.7%. Food items such as pizza, butter, chocolate and beef dropped month-on-month. Harvir Dhillon, an economist at the British Retail Consortium, said: “This was driven largely by intense competition between supermarkets, trying to entice their customers during a warm spell of weather, despite supply chain pressures.”
Will lower inflation last?
Experts have warned that June’s inflation reading could be a low point before price rises speed up again over the rest of the year. This is partly because Ofgem’s price cap increased by 13% in July compared with previous rates, meaning the typical household’s gas and electricity bill will increase by £221 to £1,862 a year. Felix Feather, an economist at Aberdeen Investments, said June’s cost-of-living relief was likely to be “fleeting”. “Household energy bills have yet to fully reflect this summer’s energy price shock, and the increase in the Ofgem price cap will push inflation higher again in the months ahead,” he said. Yael Selfin, chief economist at KPMG, said: “We expect June to mark the trough, with inflation set to edge up from July as higher household energy bills take effect coinciding with the rebound in fuel prices.”
How high could inflation go?
The Bank of England has said it is expecting CPI inflation to rise to a peak of about 3.25% towards the end of 2026, according to its latest forecasts. But it has stressed that the energy market remains volatile and swayed by developments in the Middle East. Economists at ING are forecasting inflation to peak at just below 3.5% late this year or in early 2027.
What is the Government doing to help?
Prime Minister Andy Burnham has said he wants efforts to ease the cost of living for people to be a top priority. On his first full day on the job, he announced that electricity bills will be VAT-free from October 1, saving households about £45 a year. Cutting VAT from 5% to 0% is estimated to reduce CPI inflation by around 0.1 percentage points when it comes into effect, according to the Government. The Government also announced plans to reinstate a £2 cap on bus fares, but this will not be in place until January. Newly appointed Chancellor John Healey said in response to the latest inflation figures: “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.”
What does this all mean for interest rates?
Some economists think that the drop in inflation will take the pressure off the Bank of England to raise interest rates next week. This means policymakers could vote to keep rates unchanged at 3.75%, which would be the fifth consecutive time. James Smith, developed markets economist for ING, said the latest inflation figures “provide no compelling reason to hike interest rates right now”. “We expect the Bank of England to hold rates throughout 2026 before looking to cut rates gradually from next spring,” he said.
