‘False dawn’: June inflation falls to 2.6 per cent but analysts say rises ahead
Inflation remained stuck above the Bank of England’s target rate despite government promises to tackle the cost of living.
The Office for National Statistics said consumer price index (CPI) inflation was 2.6 per cent in the year to June. Analysts predicted the price growth reading to be 2.7 per cent, lower than the 2.8 per cent reading for May.
The reading for core CPI inflation, which strips out volatile food and energy items, was 2.6 per cent.
Fresh data on price growth reflects the UK government’s difficulties in getting inflation to stick to the Bank of England’s two per cent target rate.
Price growth is forecast to edge up later this year again closer to three per cent, according to most City analysts and the Bank.
Suren Thiru, economist at the Institute of Chartered Accountants in England and Wales, said June data was a “false dawn” as inflation was likely to rise above three per cent from next month due to a jump in the Ofgem energy price cap.
“Renewed US–Iran hostilities have reignited inflation fears, with rising oil prices and supply chain pressures putting the prospect of inflation touching four per cent later this year back on the table, despite October’s VAT cut on electricity bills,” Thiru said.
“Elevated inflation will likely become a more notable economic headache for the new Chancellor in the coming months by deepening the cost‑of‑living crunch, while also squeezing his fiscal headroom, raising borrowing costs, and increasing financial market volatility.”
Inflationary forces sourced from a rise in raw material prices by 7.3 per cent in the year to June and another spike in oil and gas prices are expected to contribute to higher price growth.
Business tax hikes after Rachel Reeves’ first Budget and disruption in critical trade of oil supplies due to the blocking of the Strait of Hormuz as a result of the Iran war has rattled the UK and left households exposed to higher price rises.
Before leaving the government, Reeves announced a summer savings package which included subsidies for children’s meals and travel, as well as a continued freeze on fuel duty after September. Analysts suggested it would reduce the impact of the inflation shock.
Since Andy Burnham took to Downing Street with John Healey as the Chancellor, ministers have pushed to “reprioritise” spending to ease cost of living pressures.
Burnham announced that VAT would be stripped from household electricity bills from October this year, which could knock around 0.2 percentage points off inflation.
The Prime Minister has promised to deliver a series of other policies to ease cost pressures on households. On Wednesday, he announced bus fares would be capped at £2 again.
However, the country’s seventh leader in 10 years has already come under fire over making “unfunded” promises. Darren Jones, who was Sir Keir Starmer’s chief secretary, criticised Burnham for saying that plans to scrap the digital ID would fund the tax cut on energy bills.
Inflation watch
Bank of England officials will likely keep a close eye over Burnham’s plans and response to the energy price shock from the Iran war.
The Bank is widely expected to hold interest rates at 3.75 per cent at its next meeting on 30 July.
`Short-term gilt yields suggest that markets believe at least two interest rate hikes will come as the UK battles against high inflation.
Capital Economics’ Ruth Gregory said a weakened labour market will stop prices from spiralling further as they did after Russia’s full-scale invasion of Ukraine.
“If we’re right, then by the end of next year inflation may have fallen to two per cent. That explains why we’re expecting the Bank of England to keep interest rates at 3.75 per cent this year and cut them to three per cent next year,” Gregory said.