Britain’s annual consumer price inflation unexpectedly rose to 3.6% in June, reaching its highest level since January 2024, according to data released today by the Office for National Statistics (ONS). The surprise increase adds new complexity to the Bank of England’s upcoming decision on whether to lower interest rates next month.
Economists surveyed by Reuters had anticipated inflation would hold steady at May’s 3.4% reading. Instead, the latest figures show inflation steadily creeping upward from a low of 1.7% last September—far above the Bank of England’s 2% target.
The ONS attributed June’s inflation spike to rising transport costs, with higher motor fuel prices, airfares, and rail fares driving the increase. Prices for clothing, footwear, red wine, and lager also edged higher.
Sterling edged up slightly against the US dollar following the release of the data, as markets reassessed expectations for an imminent rate cut.
“While we still anticipate that the Bank of England will continue its path of gradual rate reductions, this inflation surprise makes the August decision much harder to call,” said Martin Sartorius, principal economist at the Confederation of British Industry (CBI).
The Bank of England has already lowered interest rates by a full percentage point since last August, in four quarter-point steps. Analysts had widely expected another rate cut in August, and another by year-end. However, today’s data may force policymakers to reconsider.
The bank’s governor, Andrew Bailey, has previously signaled that rates are likely to move down gradually, pointing to a weakening labour market and slow economic growth as factors that could ease inflationary pressures. But some officials remain concerned that persistent wage growth and supply constraints—particularly skills shortages—could keep inflation elevated for longer.
A key figure closely watched by the Bank, services inflation, remained stubbornly high at 4.7% in June, defying economists’ expectations for a decline to 4.6%. The measure is often used as a proxy for domestic inflationary pressures, making it especially significant for monetary policy decisions.
Food and non-alcoholic drink prices also rose 4.5% year-on-year in June—the highest increase since February—adding to the strain on household budgets.
In its most recent forecasts published in May, the Bank of England projected that headline inflation would return to target only by the first quarter of 2027, underscoring the challenges it faces in balancing economic support with inflation control.
With the August interest rate meeting approaching, pressure is mounting on the central bank to strike the right balance between tackling inflation and supporting a still-fragile economy.
