UK inflation slows to 2.6% in June, below forecast

UK consumer price inflation eased to 2.6% in June from 2.8% in May, coming in below the 2.7% forecast, as cheaper fuel, clothing and food pulled the rate closer to the Bank of England’s 2% target, according to the Office for National Statistics. 

Motor fuel, led by diesel, fell after earlier declines in crude oil. Retailers cut clothing and footwear prices more sharply than last summer. Food prices dropped for items including chocolate, margarine and beef. Lower transport and food costs offset modest increases across most other categories.

Input prices paid by manufacturers declined for the first time since January, mainly reflecting cheaper crude oil, and the pace of growth in factory-gate prices slowed again, the statistics office reported.

ONS chief economist Grant Fitzner noted: 

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 raw material costs dipped and output price pressures continued to moderate.

The Bank Rate stands at 3.75%. The figures arrive ahead of the central bank’s meeting later this month, after recent comments from some Monetary Policy Committee members about the risk of inflation staying above target.

The government highlighted the slowdown while setting out plans aimed at household budgets. Prime Minister Andy Burnham has announced a winter cut to VAT on electricity bills and a lower cap on bus fares in England. Chancellor John Healey called the drop in price growth “news families want to hear,” adding that more work is planned to give people “the breathing space they need,” including the VAT cut and a £2 cap on bus fares from January.

Opposition parties challenged the approach, noting that inflation remains above the 2% goal. Shadow chancellor Mel Stride argued that tax and borrowing plans had lifted inflation and claimed Burnham had made large spending commitments without explaining how they would be funded.

Some economists warned that energy costs could push inflation higher later in the year. Gold climbed 1.3% to $4,132.79 an ounce, while Brent crude traded back above $90 a barrel this week. 

Charlotte O’Leary, associate economist at the National Institute of Economic and Social Research, observed: 

Next month’s data will uncover the impact of the long-awaited increase in Ofgem’s energy price cap, and with hostilities in the Middle East intensifying, putting wholesale energy prices under pressure again, we anticipate the October cap will remain elevated as we enter cooler months. A cut in household electricity VAT may alleviate some upward pressure later in the year, but its impact is likely to be limited, particularly as energy prices continue to feed into production. 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.

Joe Nellis, economic adviser at accountancy firm MHA and emeritus professor at Cranfield University, viewed the fall to 2.6% as “a welcome piece of good news for the incoming prime minister and his chancellor as they look to set out their policy agenda.” He noted that while inflation is still above the 2% target, it is running below projections published earlier this year, pointing to the IMF’s April outlook, which put UK inflation near 4% by the end of 2024.

Economists had expected a decline to 2.7%. The statistics office reported that weaker transport and food prices offset modest increases in most other goods and services.