UK Inflation Jumps in June to its Highest in Over Year

June's reading from the Office for National Statistics (ONS) – took the annual consumer price index (CPI) rate to its highest since January 2024 – against expectations from economists in a Reuters poll for it to remain unchanged at May's reading of 3.4%.British inflation has risen steadily since touching a three-year low of 1.7% last September, and in May the Bank of England forecast it would peak at 3.7% in September – almost twice the central bank's 2% target.

Sterling rose slightly against the dollar after the data, which may put pressure on the BoE not to cut interest rates at its next meeting in August.

"While we still expect the Bank of England's Monetary Policy Committee to continue gradually cutting rates, today's upside inflation surprise means its August decision will be finely balanced," Martin Sartorius, principal economist at the Confederation of British Industry, said.

Higher costs for motor fuels, air fares and rail fares were the biggest contributors to the rise in the inflation rate between May and June, the ONS said and it also noted an increase in the cost of clothing, shoes, red wine and lager.

Previously, April saw a particularly sharp jump in inflation to 3.5% from 2.6% due to rises in regulated energy and water tariffs, a spike in air fares, and upward pressure on the cost of labour-intensive services from an increase in employment taxes and the minimum wage.

Despite this, Governor Andrew Bailey has said interest rates are likely to remain on a gradual downward path, as a weaker labour market puts downward pressure on wage growth and the outlook for economic growth remains lacklustre.

The BoE has cut interest rates by four quarter-point steps since August, and economists polled by Reuters last month forecast two more quarter-point rate cuts this year, including a likely move in August.

However, some BoE policymakers are concerned that skills mismatches in Britain's labor market and other supply constraints will keep wage growth running too fast for inflation to return to target any time soon.

Services price inflation, a measure the BoE views as a better guide to domestically generated price pressures than the headline CPI rate, held at 4.7% in June, in contrast to economists' forecasts for it to fall to 4.6%.

Food and non-alcoholic drink prices were 4.5% higher than a year earlier, the biggest rise since February 2024.

The BoE forecast in May that headline inflation would be back on target in the first quarter of 2027.

Source: Daily Sabah