UK inflation fell more than expected to 2.6% in June, giving a boost to Andy Burnham's plans to cut the cost of living.
The new prime minister has promised to reduce the cost of living to give households more disposable income and improve the outlook for the economy. He announced a cut in VAT on electricity bills over the winter and lowered the cap on bus fares in England.
Last month's consumer price index beat economists' forecasts of a fall to 2.7% from 2.8% in May, as fuel prices, particularly diesel, fell, helped by an unstable ceasefire in the Middle East conflict.
According to the Office for National Statistics, prices for clothing fell month-on-month, as did transport and food, offsetting moderate price increases for most other goods and services.
ONS chief economist Grant Fitzner said: “Food prices fell this month, driven by products such as chocolate, margarine and beef. Clothing prices also fell as the summer sales began, with deeper discounts than last year.”
“The cost of raw materials fell for the first time since January, largely due to the fall in the price of crude oil, while the increase in the cost of goods leaving factories has slowed again.”
Graphic showing the inflation rate in the UK from before 2018 to June 2026
However, analysts noted that the reprieve was likely to be temporary as the recent escalation of hostilities in the Middle East sent the price of Brent crude oil back above $90 a barrel this week.
The National Institute for Economic and Social Research (Niesr) said it expects inflation numbers to worsen in the second half of the year, driven by a 13% rise in the energy price cap since early July and the worsening situation in Iran.
New chancellor John Healey said the fall in price growth was “a message families want to hear” but that “there is much more to be done to give people the breathing space they need”.
He added: “That's why yesterday we cut VAT on electricity bills and today we're announcing a £2 cap on bus fares from January. We've chosen to focus on the cost of living in our first week, signaling that caring for working people will be at the heart of everything we do.”
Shadow Chancellor Mel Stride blamed the government for keeping inflation above the Bank of England's 2 percent target.
“Labour’s tax rises and reckless borrowing have fueled inflation and Andy Burnham has already made billions of pounds in spending commitments with no plan to pay them,” he said.
Joe Nellis, economic adviser at accountancy firm MHA, said the fall in inflation to 2.6% was “welcome good news for the new prime minister and his chancellor as they seek to set out their policy agenda”.
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Nellis, emeritus professor at Cranfield University, added: “The escalation of tensions in the Middle East in February led to fears that inflation could spiral out of control as supply chains were disrupted and oil prices rose.”
“Although inflation is consistently above the Bank of England’s 2 percent target, it remains well below what was expected in the IMF’s World Economic Outlook published in April [International Monetary Fund] forecasts inflation will head to 4% by the end of the year.”
Fears that the bank could raise interest rates later this month are likely to ease. Several members of the central bank's monetary policy committee have said they are concerned that inflation could remain persistently above target unless they raise interest rates from the current 3.75%.
Charlotte O'Leary, associate economist at Niesr, said: “Next month's data will reveal the impact of Ofgem's long-awaited increase in the energy price cap. As hostilities intensify in the Middle East and wholesale energy prices come under renewed pressure, we expect the October cap to remain elevated as we enter the cooler months.”
“A cut in VAT on household electricity could ease 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 expect inflation to begin an upward trend from July through the first quarter of next year. As nominal wage growth continues to cool, we expect limited spillover from higher inflation to wages, giving the Bank of England scope to hold rates again.”
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