UK inflation eases to 2.6 per cent as transport and food costs slow

Figures from the Office for National Statistics (ONS) showed CPI inflation fell to 2.6 per cent in the 12 months to June, down from 2.8 per cent in May. On a monthly basis, consumer prices rose by 0.1 per cent, compared with a 0.3 per cent increase in June last year.

The broader Consumer Prices Index including owner occupiers’ housing costs (CPIH) also slowed, falling to an annual rate of 2.8 per cent from 3.0 per cent in May. Monthly CPIH inflation was 0.2 per cent, compared with 0.3 per cent a year earlier.

The ONS said transport costs, along with food and non-alcoholic beverages, made the largest downward contributions to the fall in both CPIH and CPI inflation.

Underlying inflation remained more persistent. Core CPI, which excludes energy, food, alcohol and tobacco, held steady at 2.6 per cent year-on-year, while core CPIH was unchanged at 2.8 per cent.

Goods inflation continued to moderate, with the annual CPI goods rate easing from 2.0 per cent to 1.7 per cent. However, services inflation – a closely watched measure for policymakers – remained elevated, edging down only slightly from 3.7 per cent to 3.6 per cent under the CPI measure, while the CPIH services rate was unchanged at 3.6 per cent.

The latest figures are likely to be welcomed by policymakers as evidence that inflationary pressures continue to ease, although the resilience of services inflation suggests underlying price pressures have yet to fully subside.

Felix Feather, economist at Aberdeen Investments, said: “June’s inflation data offers some welcome relief for policymakers. Lower petrol and diesel prices over the month mean that energy made less of a contribution to inflation than previously, helping to pull the headline rate lower.

“However, this relief is likely to be fleeting. Household energy bills have yet to fully reflect this summer’s energy price shock, and the increase in the Ofgem price cap will push inflation higher again in the months ahead. The proposed 5 per cent cut to household fuel VAT will come too late to have an effect in the summer. And when it does arrive, the difference it will make to the inflation outlook will be almost negligible – around 0.1ppt off the headline rate.

“As a result, we still expect inflation to move back above current levels over the remainder of the year, eventually breaching 3 per cent even if tensions in the Middle East moderate.

“However, the more important signal for the Bank of England is coming from domestically generated inflation. Labour market conditions have softened, wage growth is slowing and there remains limited evidence of the kind of second-round inflation effects that would concern policymakers. That should help prevent the energy-driven rise in inflation from becoming entrenched.

“While inflation is likely to remain above the Bank’s two per cent target for some time yet, the medium-term outlook is more sanguine. As the temporary impact from higher energy costs fades over 2027 and 2028, inflation should resume drifting lower. Of course, if the energy cost shock does not unwind, inflation would follow a higher-for-longer path.”