LONDON, July 22 - Britain's year-on-year consumer price inflation rate fell to 2.6% in June, down from 2.8% in May, official statistics showed. The June outturn was marginally below the median 2.7% forecast in a Reuters poll of economists, after an earlier surge in energy costs eased during the month when a ceasefire began in the Iran conflict.
The recent jump in energy prices has had a pronounced effect on inflation in the United Kingdom because of the country's dependence on imported natural gas. Inflation has generally stayed above the Bank of England's 2% target for most of the past five years.
The central bank has indicated that inflation is likely to rise to 3% in the third quarter. Against that backdrop, investors are anticipating the Bank of England will keep its benchmark interest rate unchanged at 3.75% at its meeting next week as officials continue to evaluate the inflationary effects of the Middle East situation.
Some members of the Bank's policymaking committee who backed a rate increase in June remain concerned about the risk that inflation could persistently exceed the 2% target. Reflecting ongoing uncertainty over the path for monetary policy, financial markets on Tuesday priced in the possibility of one, and perhaps two, quarter-point rate hikes by the end of 2026.
Separate official Office for National Statistics data released last week painted a slightly stronger picture of the British economy in May, providing some relief to new Prime Minister Andy Burnham, who took office on Monday. Those figures, published on Tuesday, showed signs of stabilisation in the labour market in recent months and lower government borrowing in June.
Key points
- Annual CPI slowed to 2.6% in June from 2.8% in May, slightly below the 2.7% median poll forecast.
- Energy price movements, linked to the Iran war and a ceasefire, played a major role in month-to-month changes; the UK relies on imported natural gas.
- The Bank of England expects inflation could reach 3% in Q3; markets expect the BoE to hold rates at 3.75% next week while pricing potential hikes through end-2026.
Risks and uncertainties
- Inflation may persistently overshoot the Bank of England's 2% target, a concern cited by some policymakers - this poses upside risks to financial markets and borrowing costs.
- Ongoing effects of the Middle East conflict on energy prices create uncertainty for the energy sector and broader inflation readings.
- Monetary policy path remains uncertain as markets weigh the prospect of one or two further quarter-point rate increases by end-2026, which could affect credit-sensitive sectors.