LONDON – British inflation cooled by more than expected in June driven by a fall in petrol prices after a brief de-escalation in the Iran war, but the slowdown offers only temporary relief to new Prime Minister Andy Burnham as he seeks to ease living costs.
Consumer prices rose by 2.6 per cent in annual terms in June – the weakest increase since March 2025 and slowing from 2.8 per cent in May, the Office for National Statistics said on July 22.
A Reuters poll of economists had shown a median forecast of 2.7 per cent in June as a surge in energy prices caused by the Iran war eased off during the month when a ceasefire began. However, the conflict has revived since then, pushing up energy costs.
“A fall in motor fuel prices, particularly diesel, helped ease inflation in June,” ONS chief economist Grant Fitzner said.
“The cost of raw materials dipped for the first time since January, mainly due to the lower price of crude oil, while the increase in the costs of goods leaving factories slowed again.”
British inflation ran lower in June than in the United States and the euro zone where it stood at 3.5 per cent and 2.8 per cent respectively.
The leap in energy costs has had a big impact on Britain due to its reliance on imported natural gas.
It has mostly been above the Bank of England’s 2 per cent target over the past five years. The central bank has said inflation is likely to rise to 3 per cent in the third quarter.
The data on July 22 showed inflation for services, closely watched by the central bank as a guide to underlying price pressures, slowed to 3.6 per cent in June from 3.7 per cent in May but was slightly stronger than economists’ forecasts of 3.5 per cent.
Investors expect the central bank to keep its benchmark interest rate at 3.75 per cent next week as it continues to assess the impact of the Middle East conflict.
“Today’s data strengthens the case for the Bank of England’s cautious approach, with underlying inflationary pressures remaining relatively muted in an environment of weak domestic demand,” Yael Selfin, chief economist at KPMG, said.
Some Bank of England policymakers who voted to increase borrowing costs in June are worried about the risks of inflation persistently overshooting the 2 per cent target.
Financial markets on July 21 priced in one or possibly two quarter-point interest rate increases by the end of 2026.
ONS data last week painted a slightly better picture of Britain’s economy in May, giving some relief to Burnham who took office on July 20.
Since then, his government has announced a cut in tax on energy bills and a lower cap for bus fares.
Figures released on July 21 showed signs of stabilisation in the labour market in recent months and weaker government borrowing in June. REUTERS