Nikka Sulton

UK inflation eased to its lowest level in 15 months during June, providing some welcome relief for households. However, economists have warned that the improvement may only be temporary, with higher energy bills and renewed geopolitical tensions expected to push inflation back up later this year.

According to the latest figures from the Office for National Statistics (ONS), Consumer Prices Index (CPI) inflation fell to 2.6% in June, down from 2.8% in May. This marks the lowest annual inflation rate since March 2025 and came in slightly better than economists had anticipated, with most forecasting a fall to 2.7%.

Lower Fuel and Food Prices Drive Inflation Down

The biggest contributor to June’s lower inflation figure was the drop in fuel prices. Average petrol prices fell by 2.1p per litre between May and June, while diesel prices declined by 10.7p per litre.

Although fuel prices remain significantly higher than they were a year ago—up more than 21% annually—June marked the first monthly reduction since the Middle East conflict began earlier this year, which had previously pushed oil prices sharply higher.

The RAC also reported one of the largest monthly falls in diesel prices since its records began in 2000. The decline followed news of a temporary ceasefire agreement between the United States and Iran, which helped bring global oil prices back down.

Food prices also eased during June. Annual inflation for food and non-alcoholic drinks dropped from 2.2% to 1.7%, with lower prices recorded for products including chocolate, beef and margarine. Strong competition between supermarkets is believed to have played a significant role in keeping prices under control.

Seasonal summer sales also helped reduce clothing prices, adding further downward pressure on overall inflation.

Relief May Be Short-Lived

Despite the encouraging figures, many economists believe inflation is unlikely to remain this low for long.

At the beginning of July, Ofgem introduced a 13% increase to the energy price cap, meaning the average annual household energy bill is expected to rise by around £221, taking the typical bill to approximately £1,862 per year.

Meanwhile, renewed tensions in the Middle East have once again pushed oil prices higher during July, raising concerns that transport and energy costs could increase again over the coming months.

Several economists now expect inflation to climb back towards 3.4% by November, particularly if higher energy costs begin feeding through into household bills and supply chains.

Government Announces Cost of Living Measures

The latest inflation figures arrived shortly after Prime Minister Andy Burnham entered office and announced a number of measures aimed at reducing living costs.

Among the first announcements were:

The removal of VAT from household electricity bills from October, saving the average household around £45 per year.
A nationwide £2 cap on single bus fares across England, due to begin in January.

The Government believes removing VAT from electricity bills could reduce inflation by approximately 0.1 percentage points once implemented.

Chancellor John Healey welcomed the latest inflation figures but acknowledged that more support is needed.

He said lowering the cost of everyday essentials remains one of the Government’s immediate priorities, describing the latest policy announcements as practical measures to help households while also easing inflationary pressures.

Opposition Raises Concerns

Despite the improvement in inflation, opposition politicians argued that prices remain above the Bank of England’s 2% target, meaning many families are still facing significant financial pressure.

Critics also questioned the affordability of the Government’s recent spending commitments, warning that additional borrowing could place further pressure on inflation in the future.

What Could Happen Next?

Financial markets currently expect the Bank of England to keep interest rates unchanged at 3.75% during its next meeting while it continues to assess the impact of global events on inflation.

However, expectations for the remainder of 2026 remain uncertain. Some analysts believe one or even two further interest rate increases may still be necessary if inflation begins rising again later this year.

Economists also warn that food prices could increase once more if higher energy costs and more expensive fertilisers continue working their way through agricultural supply chains.

Retailers Face Ongoing Cost Pressures

Industry experts welcomed June’s lower inflation figures but warned that retailers continue to face mounting financial pressures.

Higher National Insurance costs, increased packaging taxes and ongoing supply chain disruption are all adding to business expenses. While supermarkets have absorbed some of these costs through intense competition, there are concerns that this may not be sustainable over the longer term.

Many economists believe the coming months could prove challenging as businesses balance rising operating costs with consumers’ increasing sensitivity to higher prices.

Final Thoughts

June’s inflation figures offer encouraging news after months of elevated price growth, with lower fuel and food costs providing some relief for households. However, much of that improvement may prove temporary.

With higher energy bills already taking effect, oil prices rising once again and ongoing geopolitical uncertainty, inflation is widely expected to increase later this year. As a result, both households and policymakers are likely to continue facing significant cost-of-living challenges throughout the remainder of 2026.