UK inflation fell more than expected in June to 2.6%, providing a boost for Prime Minister Andy Burnham's plans to reduce the cost of living. The consumer prices index (CPI) reading surpassed economists' forecasts of a decline from 2.8% in May to 2.7%, driven by falling fuel prices, particularly diesel, amid an unstable truce in the Middle East conflict.
Details of the inflation drop
The Office for National Statistics reported that clothing prices also dropped month on month, along with transport and food costs, offsetting modest increases in most other goods and services. Grant Fitzner, the ONS chief economist, said: “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.” He added that the cost of raw materials dipped for the first time since January, mainly due to lower crude oil prices, while the increase in costs of goods leaving factories slowed again.
Impact on cost-of-living measures
Burnham has pledged to bring down the cost of living to increase household disposable income and improve the economic outlook. His government has announced a winter VAT cut on electricity bills and a cap on bus fares in England. Chancellor John Healey said the drop in inflation was “news families want to hear” but acknowledged there is more work to do. He stated: “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.”
Analyst warnings and outlook
Analysts cautioned that the reprieve may be temporary, as the recent escalation of Middle East hostilities pushed Brent crude back above $90 a barrel. The National Institute of Economic and Social Research (Niesr) expects inflation to worsen in the second half of the year, reflecting a 13% rise in the energy price cap from July and the deteriorating situation around Iran. Shadow Chancellor Mel Stride blamed the government for inflation remaining above the Bank of England's 2% target, saying: “Labour’s tax hikes and reckless borrowing stoked inflation, and Andy Burnham has already made billions of pounds of spending commitments without any plan to pay for them.”
Joe Nellis, economic adviser at MHA, called the fall “a welcome piece of good news” for the new government. He noted that while inflation remains above target, it is far below expected levels, citing the IMF's April prediction of inflation heading toward 4% by year-end. Concerns about a Bank of England interest rate hike this month may ease, though some monetary policy committee members worry about persistent inflation. Charlotte O’Leary of Niesr forecast an upward trajectory for inflation from July through early next year, with the energy price cap and Middle East tensions putting pressure on wholesale prices. She said: “Overall, we forecast inflation to begin an upward trajectory from July through the first quarter of next year. With nominal pay growth continuing to cool, we expect limited spillover from higher inflation into wages, giving the Bank of England room to hold rates once again.”
