UK June Inflation Drops to 2.6%, Lowest in 14 Months

According to the latest data released by the UK Office for National Statistics (ONS), the country's consumer price index (CPI) rose 2.6% year-on-year in June, down from 2.8% in May. This not only fell below economists' expectations of 2.7% but also marked the lowest level in 14 months. This data provides strong economic momentum for the newly appointed Prime Minister Andy Burnham and his cabinet, who took office this week.

The inflation decline, exceeding expectations, was primarily driven by falling fuel prices. Gasoline and diesel prices dropped 3.1% in June alone, reducing the fuel inflation rate from 24.6% to 21.3%. Inflation for food and beverages also slowed from 2.2% to 1.7%, the lowest level since August 2024.

Additionally, the ONS chief economist noted that summer discounts drove clothing prices down, and falling crude oil prices led to the first decline in raw material costs since January.

Newly appointed Chancellor John Healey said the drop in inflation is welcome news for households, but emphasized that the government still has more work to do.

The Burnham government demonstrated its determination to address the cost-of-living crisis in its first week, announcing a series of policies, including capping nationwide bus fares at £2 and implementing a one-year value-added tax (VAT) exemption on winter electricity bills. This is expected to reduce the CPI by an additional 0.2 percentage points starting in October.

Despite the improvement in inflation data, economic experts remain cautious. Core inflation remains steady at 2.6%, and service sector inflation has only slightly declined. Capital Economics predicts that due to the lag effect of energy prices and a 13.5% increase in the utility price cap in July, inflation could rebound to over 3.0% by September and even reach 3.5% by early 2027.

Moreover, ongoing instability in the Middle East has pushed Brent crude oil prices back above $90 per barrel, posing a risk to future price volatility. Markets expect the Bank of England to keep its base rate unchanged at 3.75% next week to continue assessing the impact of global developments on the economy.