Key Takeaways:
Softer-than-expected UK inflation data pushed the pound lower and raised bets on Bank of England rate cuts.
UK consumer price inflation slowed to 2.6% in the 12 months through June, down from 2.8% in May and matching the lowest reading since March 2025, the Office for National Statistics said Wednesday. The decline, driven by falling fuel and food prices, undershot the 2.7% median estimate from economists surveyed by Bloomberg and sent the British pound lower against the US dollar in early London trading.
"The fall in motor fuel prices, particularly diesel, helped ease inflation in June," said Grant Fitzner, chief economist at the ONS. "Food prices fell this month, driven by products including chocolate, margarine and beef. Clothing prices also fell with the start of summer sales, with bigger discounts than last year."
The average price of unleaded petrol fell to 155.89 pence per liter on June 15 from 159.48 pence on May 29, according to the RAC. Diesel dropped even more sharply, to 176.77 pence from 191.54 pence in mid-April. Food and non-alcoholic drink price growth slowed to 1.7% from 2.2% in May, its lowest since August 2024. Core CPI, which strips out energy, food, alcohol and tobacco, held steady at 2.6%, while the broader CPIH measure including housing costs eased to 2.8% from 3%. The ONS's Fitzner noted that raw material costs dipped for the first time since January, mainly because of lower crude oil prices.
The data gives the Bank of England more room to consider further rate cuts from the current 3.75% benchmark, where it has held since its last reduction. The BoE last cut rates in May, bringing borrowing costs down from 4% as inflation moderated from the 11.1% peak reached in October 2022. Overnight-indexed swap markets shifted to price a higher probability of a quarter-point cut at the Monetary Policy Committee's next meeting in August, according to Bloomberg calculations. "Expect a bumpy path with energy prices back on the rise," said Sanjay Raja, chief UK economist at Deutsche Bank. "While we're nowhere close to the peaks seen during the height of the Iran conflict, the energy disinflation path remains uncertain."
The pound's weakness reflects a repricing of the rate outlook. Sterling fell as much as 0.4% against the dollar to below $1.28, extending its decline from last week's three-month high. The move came alongside a modest selloff in UK gilt yields, with the two-year yield slipping 5 basis points to 3.82% as traders added to rate-cut wagers. The employment report released Tuesday showed the jobless rate holding at 4.9% while average weekly earnings growth slowed to 4.3% in the three months through May, the lower end of the forecast range — a combination that reinforces the case for looser policy.
The inflation trajectory faces headwinds in the second half. Energy prices are expected to rise as the base effects from last year's declines fade, and Brent crude remains about 26% above its July lows near $70 a barrel, trading close to $90 as the US continues strikes on Iranian targets. Pantheon Macroeconomics had forecast the June print at 2.6%, while Deutsche Bank had expected 2.7% before a subsequent rise. For the BoE, the June data provides cover to cut in August, but the path beyond depends on whether services inflation and wage growth continue to moderate — and on how the energy market evolves through the autumn.
This article is for informational purposes only and does not constitute investment advice.
