UK inflation dropped to 2.6% in June, down from 2.8% in May, according to data from the Office for National Statistics (ONS).
Much of this fall was a result of falling petrol and diesel prices as energy costs dropped sharply following the ceasefire between the US and Iran – although tensions have re-escalated since.
Grocery inflation has slowed to its weakest rate since December 2024, while services inflation, closely watched by central bankers as a gauge of underlying price pressures, eased from 3.7% to 3.6%.
However, most agreed that this drop could be short-lived, with inflation expected to rebound in the coming months due to renewed escalation in the Middle East and a rise in the energy cap taking place next month.
Felix Feather, economist at Aberdeen Investments, said: “June’s inflation data offers some welcome relief for policymakers. 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.”
Earlier this week, new prime minister Andy Burnham announced that VAT on household electricity bills will be scrapped from October, but this proposal will come too late to stave off inflation over the summer, he noted.
“And when it does arrive, the difference it will make to the inflation outlook will be almost negligible – around 0.1 percentage point off the headline rate,” said Feather.
He was not alone in warning that the latest reading will prove temporary. George Brown, senior economist at Schroders, noted that oil prices have already started to rally again, while JP Morgan Personal Investing’s Scott Gardner noted that the July energy price cap rise will also start to feed into the data.
The JPM investment specialist suggested that the Bank of England will be watching closely to see if there is a renewed energy-driven spike in inflation, while, for households, cost-of-living pressures are likely to remain a challenge in the second half of the year.
Feather expects inflation to rise back above 3% between now and the end of the year, adding that it is “likely to remain above the Bank's 2% target for some time yet”.
“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.”
Brown added that markets are currently pricing in more than two rate hikes over the next year, although he said that the crucial question is whether this remains an energy shock or becomes a domestic inflation problem.
“So far, a cooling labour market suggests there is little risk of the sort of second-round effects that would warrant tighter monetary policy,” he said.
“We think the Bank can stay on hold as it gauges whether the latest energy shock is just a temporary bump in the road or something more persistent.”
The next Bank of England interest rate decision is scheduled for Thursday 30 July.