A Reuters poll of economists had forecast annual inflation of 2.7% for June, as a surge in energy prices caused by the Iran war eased during the month after a ceasefire began. However, the conflict has since resumed, pushing energy costs higher.
“A fall in motor fuel prices, particularly diesel, helped ease inflation in June,” ONS Chief Economist Grant Fitzner said.”The cost of raw materials fell for the first time since January, mainly due to lower crude oil prices, while the increase in the cost of goods leaving factories slowed again.”
British inflation was lower in June than in the United States and the euro zone, where it stood at 3.5% and 2.8%, 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% target over the past five years. The central bank has said inflation is likely to rise to 3% in the third quarter.Wednesday’s data showed inflation for services, closely watched by the BoE as a guide to underlying price pressures, slowed to 3.6% in June from 3.7% in May but was slightly stronger than economists’ forecasts of 3.5%.
Investors expect the BoE to keep its benchmark interest rate at 3.75% 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 BoE policymakers who voted to increase borrowing costs in June are worried about the risks of inflation persistently overshooting the 2% target.
Financial markets on Tuesday 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 Monday.
Since then, his government has announced a cut in tax on energy bills and a lower cap for bus fares.
Figures released on Tuesday showed signs of stabilisation in the labour market in recent months and weaker government borrowing in June.
