UK inflation exceeded expectations by rising to 3.6% in the 12-month period ending in June. Most analysts had predicted inflation to remain steady at 3.4% or experience a slight increase to 3.5%.
This marks the highest inflation rate in nearly 18 months. The Office for National Statistics (ONS) attributes this increase primarily to higher food prices and less significant declines in fuel prices compared to the previous year.
Maintaining inflation around 2% is the target, with the Bank of England aiming to achieve this by adjusting its base interest rate, currently set at 4.25%. The upcoming Bank of England meeting on August 7 will determine whether the rate remains unchanged, or if adjustments are made.
Core inflation, excluding volatile energy, food, alcohol, and tobacco prices, rose from 3.5% to 3.7%. Richard Hays, the Acting Chief Economist at the ONS, highlighted that the uptick in inflation in June was mainly driven by minimal decreases in motor fuel prices compared to the substantial drop seen a year ago.
Chancellor Rachel Reeves expressed awareness of the challenges faced by working individuals due to the cost of living. Initiatives like increasing the national minimum wage for three million workers, introducing free breakfast clubs in primary schools, and extending the £3 bus fare cap have already been implemented, with a commitment to further actions outlined in the Plan for Change to boost people’s income.
Inflation reflects changes in the prices of goods and services over time, measured primarily by the Consumer Price Index (CPI). The ONS uses a “basket of goods” to calculate inflation, representing typical household purchases. While the main CPI figure provides an average, individual prices of specific goods may deviate.
The Bank of England has raised interest rates gradually over nearly two years to curb inflation towards the 2% target. The base rate influences borrowing costs from banks and lenders, affecting consumer spending. Higher rates increase borrowing expenses, reducing disposable income and subsequently curbing demand to lower prices and inflation.
Following a peak of 5.25% in August 2023, the base rate has been reduced four times, settling at the current level of 4.25%. Inflation surged in 2021, reaching 11.1% in October 2022, driven by increased energy and food costs post-Covid. Geopolitical events, such as the Russian invasion of Ukraine, further escalated energy and food prices.
In September last year, inflation hit a three-year low at 1.7% before gradually rising again from October onwards.