The UK's inflation rate has taken a modest step back from the brink, falling to 2.6% in June according to the Office for National Statistics (ONS). This is a slight relief for consumers and policymakers alike, as it undershoots market expectations of 2.7%. The decrease marks a 0.2 percentage point drop from May's reading of 2.8%, with core CPI – which strips out volatile food and energy components – also registering at 2.6%.
Despite this welcome reprieve, City analysts and the Bank of England remain on high alert for future inflationary pressures. Suren Thiru, economist at the Institute of Chartered Accountants in England and Wales, warns that the data is a "false dawn", predicting that inflation will exceed 3% from next month. This uptick is largely attributed to an anticipated increase in the Ofgem energy price cap, which is expected to add significant strain on household finances.
The ongoing US-Iran tensions have also injected fresh uncertainty into global markets, driving up oil prices and exacerbating supply chain disruptions. These external factors are compounded by a 7.3% rise in raw material prices over the past year, threatening to push inflation towards 4% later this year. The Strait of Hormuz, a critical trade route for oil supplies, remains closed due to the Iran conflict, further ratcheting up energy costs.
The new government faces an uphill battle in managing these inflationary pressures, with the Prime Minister and Chancellor promising various measures to mitigate their impact. Notably, Andy Burnham has committed to removing VAT from household electricity bills from October, a move expected to shave 0.2 percentage points off inflation. Other policies, such as capping bus fares at £2, have also been announced – although some critics argue that these promises lack a clear funding strategy.
The Bank of England is keeping a close eye on developments as it prepares its next move. Expectations are high that interest rates will remain steady at 3.75% when the Monetary Policy Committee meets on 30 July, but short-term gilt yields suggest financial markets anticipate at least two further hikes in the coming months. While a weakening labour market may curb price growth, Capital Economics' Ruth Gregory forecasts inflation could dip to 2% by the end of next year – potentially prompting the Bank to cut interest rates to 3% by 2027.