UK inflation falls to 2.6%: ‘Striking disconnect’ between official rate and reality

Inflation may have fallen back further but experts have warned of a “striking disconnect” between the official headline rate and what households face on a daily basis.

According to the latest figures from the Office for National Statistics (ONS), the annual rate of consumer prices index (CPI) inflation eased to 2.6 per cent last month, down from 2.8 per cent in May. This marks the lowest level since March 2025, with the reading coming in below the 2.7 per cent rate that most economists had been expecting.

The lower-than-expected CPI rate is set to provide some relief to new Prime Minister Andy Burnham who has made efforts to ease the cost of living a top priority.

The Office for National Statistics noted in its latest inflation data that some food prices had fallen in June, year on year.

Kevin Brown, savings expert at Scottish Friendly, the Glasgow-based financial mutual, said: “A dip in inflation in June creates a striking disconnect between months of alarming headlines about the Middle East and an official rate that has nevertheless continued to move lower.

“People shouldn’t be complacent. [June’s] figure is arguably backward-looking and may not fully reflect yet the higher energy costs households will begin to face following July’s energy price-cap change.

“Lower inflation still means prices are rising, not falling, so UK households should consider continually reviewing savings returns, energy costs and everyday spending.”

Rob Morgan, chief investment analyst at Charles Stanley Direct, part of Raymond James, added: “For many households still recovering from previous inflation shocks it may feel as though they’re back at square one. The intense pressure on household finances is clearly something the new Prime Minister is acutely aware of.”

If the current downward path for inflation continues then the Bank of England (BoE) may not be forced into hiking interest rates. However, the IMF has already predicted that inflation will head back towards 4 per cent by the end of the year amid renewed geopolitical hostilities and a rebound in oil prices and energy costs. The UK central bank has a remit to hold inflation at around 2 per cent.

Daniel Casali, chief investment strategist at wealth manager Evelyn Partners, noted that financial markets were pricing in at least one quarter-point increase in the bank base rate by the end of 2026.

“This likely reflects expectations that headline CPI will remain higher for longer than previously anticipated, as underlying inflationary pressures prove more persistent,” he added. “Rising interest-rate expectations have already placed upward pressure on gilt yields.

“The two-year gilt is trading at around 4.4 per cent and could move higher should the BoE adopt a more hawkish stance at upcoming monetary policy committee meetings.”

ONS chief economist Grant Fitzner said a fall in motor fuel prices, particularly diesel, had helped ease inflation last month.

“Food prices fell, driven by products including chocolate, margarine and beef,” he added. “Clothing prices also fell with the start of summer sales, with bigger discounts than last year.

“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.”

Average petrol prices declined by 2.1p per litre between May and June, while diesel prices dropped by 10.7p per litre.

This marked the first time petrol had eased since the start of the Middle East conflict at the end of February, which sent oil and gas prices soaring and pushed up prices at the pumps.

However, while prices were lower month-on-month, overall motor fuel prices remained 21.3 per cent higher in the year to June in a sign that the conflict has driven up the cost of living in the UK.

Susannah Streeter, chief investment strategist at Wealth Club, said: “UK inflation has eased to 2.6 per cent in June, with some of the heat coming out of rapidly rising prices, offering some short respite for households and pushing the threat of interest rate hikes a little further into the distance.

“The fall was steeper than some forecasts, but it’s still above the BoE’s 2 per cent target. Also, it’s not likely to be long before the temperature rises again, with fresh attacks in the Middle East and the Black Sea threatening to keep prices on the boil.

“Brent crude has raced upwards again, to trade around $93 a barrel, the highest level in six weeks, and this snapshot of prices won’t capture this unwelcome development,” she added.

“Transport costs were the biggest downward driver of the headline rate of inflation, with prices of motor fuel coming down markedly, but with oil prices becoming painfully hot again, it’ll soon show up at the pumps and filter through to other consumer prices via higher freight and energy costs.”

The new Labour government announced on Tuesday that electricity bills will be VAT-free from October 1, saving households about £45 a year. Cutting VAT from the 5 per cent rate to zero is estimated to reduce CPI inflation by around 0.1 percentage points when it comes into effect, according to the government.