UK consumer price inflation slowed to 2.6% year-on-year in June, reaching its lowest level in 14 months after falling from 2.8% in May and just missing the consensus forecast of 2.7%.
Economists who commented on the data said the softer reading gives the Bank of England's Monetary Policy Committee more latitude to pause and assess policy, but they emphasised the easing may be temporary as energy and food price pressures re-emerge later in the year.
Sanjay Raja, Chief UK Economist at Deutsche Bank, noted the June print came in 0.4 percentage points below the projection published in the Bank of England's April Monetary Policy Report. According to Raja, the shortfall relative to that projection was driven by weaker-than-expected readings on services inflation, core goods prices and food inflation.
Raja cited the detailed component breakdown showing services inflation at 3.58% year-on-year, which was 0.06 percentage points below the Bank's forecast. Core goods CPI registered 0.72% year-on-year, 0.15 percentage points below the projection, while inflation for food and non-alcoholic beverages stood at 1.69% year-on-year, 1.87 percentage points under the Bank's June 2026 forecast.
In Raja's view, the June outturn will "buy the MPC more time as it deliberates on where to peg monetary policy." He added that he expects inflation to move higher toward 3.3%-3.5% year-on-year in the fourth quarter of 2026 as base effects combine with forthcoming rises in food and energy prices. Raja said that path would keep rate cuts off the table while permitting the MPC to retain a slight hawkish tilt.
Paul Dales, Chief UK Economist at Capital Economics, argued the recent easing is unlikely to be long-lasting. He pointed to movements in fuel prices as a key driver of short-run volatility: a 3.1% month-on-month decline in petrol and diesel prices in June lowered fuel inflation from 24.6% to 21.3% and subtracted 0.1 percentage point from overall CPI.
Dales noted that a rebound in oil prices from $72 per barrel to $92 per barrel means fuel prices could still fall by a further 6% month-on-month in July, which would only partially offset the roughly 0.5 percentage point boost to CPI expected from a 13.5% month-on-month rise in the Ofgem utility price cap in July. He forecast inflation would move back above 3% in September and reach around 3.5% in early 2027 before easing toward 2% by the end of 2027, a trajectory he sees supported by a weak labour market that would limit second-round wage-price effects.
On interest rates, Dales expects the Bank of England to keep the policy rate at 3.75% through this year, followed by a cut to 3% next year.
James Bentley, Director of Financial Markets Online, highlighted that core CPI remained steady at 2.6%, describing that metric as a "clearer picture of where we are." He said the Bank now has no reason to raise rates and might refrain from further increases for the remainder of the year, a pause that would provide relief to the roughly 1.8 million homeowners due to remortgage in 2026. Bentley cautioned, however, that renewed fighting in the Gulf had driven fuel prices higher again in recent days, underlining that the economy is "far from out of the woods yet."
Laurence Booth, Global Head of Markets at CMC Markets, said the June figures gave the Bank of England "greater confidence that underlying price pressures are continuing to ease, even as geopolitical tensions keep energy markets volatile." Booth framed the debate as shifting from whether inflation will tick up later in the year to whether those energy-led increases will be temporary or become embedded in the wider economy. He said the data suggested "the broader disinflation trend remains intact" and that the Bank could "remain patient, even if inflation does not return to target in a straight line."
Summary
- June headline CPI fell to 2.6% year-on-year, down from 2.8% in May and below the consensus of 2.7%.
- Deutsche Bank says the print was 0.4 percentage points below the Bank of England's April Monetary Policy Report projection, with services, core goods and food inflation softer than expected.
- Economists warn energy and food price dynamics could push inflation back above 3% later in 2026, keeping rate cuts off the table for now.
Key points
- Headline CPI eased to 2.6% y/y in June, offering the MPC extra time to assess policy - impact: financial markets and mortgage refinancing.
- Services inflation (3.58% y/y), core goods CPI (0.72% y/y) and food inflation (1.69% y/y) were all below the Bank's forecasts - impact: consumer sectors and retail pricing.
- Energy cost volatility and an upcoming Ofgem cap increase could reverse the fall in CPI, influencing household energy bills and fuel-sensitive sectors - impact: utilities, transport and consumer spending.
Risks and uncertainties
- Energy-driven rebound: A rise in oil prices and utility cap increases could push inflation higher later in the year, affecting energy-intensive sectors and household budgets.
- Geopolitical shocks: Renewed conflict in the Gulf has already pushed fuel prices up in recent days, creating uncertainty for near-term inflation and market volatility.
- Labour market dynamics: While a weak labour market could limit second-round inflation effects, any unexpected tightening would alter the projected disinflation path and affect wage-sensitive sectors.
Tags: inflation, BoE, energy, rates, UK