U.K. Inflation Falls to 15-Month Low But Accelerating Prices Loom — 3rd Update

By Ed Frankl

The U.K.'s rate of inflation in June declined to its lowest level in more than a year after gasoline costs fell, raising the likelihood that the Bank of England will keep its key interest rate on hold next week, even with prices likely accelerating in the months ahead.

Consumer prices were 2.6% higher in June than the same month of last year, slowing from a 2.8% inflation rate in both April and May, the Office for National Statistics said Wednesday. That marked the lowest annual increase in prices since March 2025. Economists polled last week by The Wall Street Journal expected a reading of 2.7%.

The fall offers some positive economic news for Britain's new Prime Minister Andy Burnham, days after he took office.

Burnham, in his first speech in the role outside Downing Street, promised to help households with the cost of living. Among his first policy announcements was a cut to value-added tax on utilities bills from October that officials said could reduce annual inflation by around 0.1 percentage point. His government on Wednesday said it would also cap most bus fares nationwide.

Before that, though, inflation is set to climb over the summer after gas and electricity regulator Ofgem lifted the energy-price cap for households by 13% at the start of July. The BOE expects inflation to peak at around 3.75% in the fourth quarter of this year.

Still, it was gasoline prices that dragged inflation down in June, with energy inflation coming in at 5.7% from 7.4% in May, the data showed. Motor fuel was 3.1% cheaper in June than May, as global oil prices fell while hostilities in the Middle East cooled.

"June's peace deal and the subsequent reduction in oil-and-gas prices helped cool CPI inflation. This will be a welcome figure to start the new prime minister's premiership, but the honeymoon period will be short-lived," said Charlotte O'Leary, associate economist at the National Institute of Economic and Social Research.

Oil prices have climbed again this month after President Trump said the tentative ceasefire between the U.S. and Iran was "over" and airstrikes resumed. Brent crude rose above $94 a barrel on Wednesday, having dropped below prewar levels earlier this month.

The slowdown in U.K. inflation was part of a broader trend, with similar declines recorded in the U.S. and the eurozone as prices of fossil fuels fell in response to hopes of a lasting reopening of the Strait of Hormuz. The eurozone's annual rate of inflation fell to 2.8% from 3.2%, while in the U.S. the pace of price rises cooled to 3.5% from 4.2%.

Before the conflict erupted, the BOE thought inflation would fall below its 2% target this year and investors had anticipated rate cuts. Now, markets price in two rate hikes between now and March, though they fully expect the central bank to hold its key rate at 3.75% next week. Sterling eased after the data release.

"All in all, it is hard to see a meaningful hawkish pivot at the July meeting, barring a sustained rise in oil prices to close to $100 a barrel going into the meeting," said Bruna Skarica, chief U.K. economist at Morgan Stanley, in a note to clients.

Indeed, although energy prices drove headline inflation to jump sharply in March, there are few signs that higher prices for oil and natural gas since the start of the war have raised the prices of other goods and services. Food inflation fell to its lowest level since August 2024, the ONS said.

Services inflation also eased to 3.6% from 3.7%, though core inflation, which strips out energy and food costs, was unchanged at 2.6%, a little stronger than expected.

That could indicate that "chipflation" has arrived in Britain, said James Smith, developed markets economist at ING.

Portable-device prices rose 22% month-on-month, the biggest change since the series began in 2015, possibly related to Apple price hikes, he said.

Meanwhile, wage growth held steady in the three months through May, official data published Tuesday showed. Higher pay demands could concern BOE policymakers as an indicator of second-round inflationary pressures that may prompt companies to raise prices.

The inflation data "strengthens the case for the BOE's cautious approach, with underlying inflationary pressures remaining relatively muted in an environment of weak domestic demand," said Yael Selfin, chief economist at KPMG U.K.

"We expect June to mark the trough, with inflation set to edge up from July as higher household energy bills take effect coinciding with the rebound in fuel prices," she added.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

July 22, 2026 05:33 ET (09:33 GMT)