UK inflation fell to 2.1% in June, its lowest level in three years, as energy prices continued to ease and food price inflation moderated. The figure, measured by the Consumer Prices Index, came in slightly below the Bank of England's 2% target and below the consensus forecast of 2.3%.
The fall was driven primarily by a 12% year-on-year decline in household energy bills, following the reduction in the energy price cap in April. Food prices, which had been a major driver of inflation over the past two years, rose by just 1.8% in the year to June — down from a peak of over 19% in early 2023.
Implications for Interest Rates
The data increases the likelihood of a further cut in interest rates at the Bank of England's August meeting. Markets are currently pricing in an approximately 70% probability of a quarter-point reduction, which would bring the base rate to 4.5%. The Bank has been cautious about cutting rates too quickly, citing concerns about services inflation, which remains elevated at 5.2%.
The Governor of the Bank of England said the inflation data was "encouraging" but cautioned that the path back to the 2% target was not yet complete. "We need to see sustained evidence that inflation is returning durably to target before we can be confident that the job is done," he said in a speech to the City of London on Thursday.
What It Means for Households
For most households, the fall in headline inflation means that the cost of living is rising more slowly than it was, but prices remain substantially higher than they were before the inflation surge. Average real wages are now growing at approximately 1.5% per year, the first sustained period of real wage growth since 2021.