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Inflation unexpectedly fell to 2.6 per cent in June following a temporary pause in the Iran war, according to figures from the Office for National Statistics.
The Consumer Prices Index (CPI) for June came in at 2.6 per cent, down from 2.8 per cent in May, driven by a large drop in fuel costs.
Core CPI, which excludes energy, food and alcohol, stayed at 2.6 per cent in June, from 2.5 per cent in April, while services inflation was down slightly from 3.7 per cent to 3.6 per cent.
What do the latest inflation figures mean for you? Where does this leave the Bank of England on interest rate hikes, and will inflation stay above the central bank’s target? We look at all this and more.
Weekly shop: High inflation has hit our household bills in recent years, from energy to food
What's the latest on inflation?
The headline inflation rate came in below expectations, driven by lower fuel and food prices, and a wider slowing in non-energy industrial goods inflation.
Core inflation stayed level at per cent, while pressure eased on services inflation, falling from 3.7 per cent in May to 3.6 per cent in June.
Fuel costs fell by 0.14 percentage points, with a 0.06 percentage point drop in food and non-alcoholic beverage prices to 1.7 per cent.
ONS chief economist Grant Fitzner said: ‘A fall in motor fuel prices, particularly diesel, helped ease inflation in June.
‘Food prices fell this month, driven by products including chocolate, margarine and beef. Clothing prices also fell with the start of summer sales, with bigger discounts than last year.’
Fitzner added: ‘The cost of raw materials dipped for the first time since January, mainly due to the lower price of crude oil, while the increase in the costs of goods leaving factories slowed again.’
What does the inflation rate mean for you?
Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.
Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent.
An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent.
Higher inflation means the rate of increase in the cost of living is increasing.
Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation - delivering a real increase in people's wealth.
> The best inflation-fighting savings deals
The main measure by which the Bank of England seeks to control inflation is interest rate rises. Higher inflation decreases the chance of base rate cuts and increases expectations of how high rates will go.
Expectations that the Bank of England would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.
> How much would a mortgage cost you? Check the best rates
Will inflation rise again?
The dip in the headline inflation rate to below the Bank of England’s own forecast of 3.1 per cent is welcome news and offers relief to incoming Prime Minister Andy Burnham.
Economists expect, however, that it will prove to be a temporary dip as the resumption of hostilities in the Middle East have pushed oil prices back to around $90 a barrel which will fuel inflation later this summer.
‘The outlook is unusually hostage to events overseas,’ says Martin Beck, chief economist at WPI Strategy. ‘The extent to which inflation rises, and how long it stays there, will depend heavily on energy prices and the course of the conflict.’
The consensus is that June’s inflation reading is more likely to be a temporary dip than a sustained downward move towards the Bank’s 2 per cent targe.
‘Looking ahead, the inflation picture becomes more complicated,’ says Kallum Pickering, chief economist at Peel Hunt. ‘Commodity prices are climbing again as Middle East tensions intensify, and July’s energy-price-cap increase will lift household bills.’
Burnham’s plans to take VAT off energy bills from October should shave around 0.1 percentage points off the headline rate, says Beck.
Pickering expects inflation to rise above 3 per cent in the second half of the year, but there is scope for more surprise downward movements.
Rob Wood, chief UK economist at Pantheon Macroeconomics, expects inflation to jump to 4 per cent in September once Rachel Reeves’ temporary summer VAT cuts on meals and recreations ends.
‘We look for inflation to peak at 3.3 per cent in November, after taking account of new PM Mr Burnham’s VAT cut on energy utilities.’
The good news is that a rerun of the inflation surge following Russia’s invasion of Ukraine can be ‘confidently ruled out,’ says Beck. ‘The labour market is much weaker, wage growth is slowing and monetary policy is already restrictive.’
Will the Bank of England raise interest rates?
June’s inflation reading offers some relief for the Bank of England, albeit fleeting. Markets are still pricing a 0.25 per cent point rate hike before year-end with around 50 per cent priced for another.
However, the central bank will more than likely hold rates at July’s meeting, with economists expecting them to hold off on raising rates for some time as they grapple with pressure on the jobs market.
‘With the economy weak, demand for workers weak and pay growth having slowed sharply, the next move in rates remains more likely to be down than up,’ says Beck.
Grim faces: The Bank of England is likely to hold the base rate next month after CPI reading
Wood expects the Monetary Policy Committee to ‘focus on the dovish news from underlying pressures and continue signalling rates on hold.’
Meanwhile, Pickering does not expect June’s inflation reading to move the dial on a hold next week or a hike in September – ‘however, we believe markets will be surprised in September when the BoE continues to hold.’
What does it mean for your savings?
Inflation can quickly erode the real value of people's savings.
Sarah Coles, head of personal finance at AJ Bell says: ‘The markets are still only expecting a single rate hike by the end of 2026, but it’s expected to hit in September, with another potentially following in February.
‘When rate expectations rise, swap rates rise, so fixed savings rates tend to do so too. However, the savings market moves slowly, and the shift in expectations has been relatively recent, so we’re yet to see much movement.
‘Rates are robust though, offering 4.9 per cent if you fix for one year, 4.85 per cent if you fix for three, and 4.93 per cent over five. The market is also particularly competitive right now, with an unusual number of banks jostling for market share. It means the most generous rates are likely to edge up. If you’re in the market for a new savings account, it’s worth keeping your eye open for a bargain and acting fast while it lasts.
> Check the best savings rates in This Is Money's independent tables
What does it mean for your mortgage?
While this morning’s data increases the likelihood of the Bank of England holding rates this month, mortgage rates have jumped this week on rate hike expectations.
Coles says: ‘This demonstrates how difficult it can be to second-guess where the mortgage market is heading at a time of such uncertainty. It’s also why it’s not worth hanging on for rates to hit a magic number, even if the market has been moving in one direction for a while. Instead, if you have a remortgage due in the next six months, check if you can agree a deal for your remortgage now. If rates fall from here, you can shop around elsewhere, but if they rise again, you’ll have locked in a competitive rate.’
> Compare the best mortgage rates based on your home's value and loan size
