UK inflation rose unexpectedly to 3.6% in June, challenging forecasts and raising doubts over further interest rate cuts this summer. The increase was driven by higher food and travel prices, highlighting persistent underlying pressures in the economy despite earlier signs of moderation.
Price increases across key sectors
The latest figures from the Office for National Statistics show that core categories such as air travel, groceries and hospitality recorded notable price rises last month. Air fares surged due to seasonal demand, while food staples like meat, dairy and sweets continued to rise, reversing the slight easing seen in early spring.
Economists had widely predicted inflation to remain steady at 3.4%, making the surprise uptick a key concern for policymakers. The Bank of England’s 2% inflation target remains distant, and the broader inflation path now appears less predictable than previously assumed.
Bank of England faces renewed pressure
The rise in inflation complicates the Bank of England’s monetary stance ahead of its next rate-setting meeting in August. Having cut interest rates four times since mid-2024, the central bank was expected to deliver at least one more reduction before the year’s end.
However, with core inflation rising to 3.7% and services inflation holding above 4.5%, analysts now expect the Monetary Policy Committee to take a more cautious view. Any delay in further rate cuts could dampen market expectations and slow momentum in rate-sensitive sectors such as housing and retail.
Consumer and business impact
The cost-of-living strain remains a major issue for households, particularly during the summer holiday period when families typically face increased spending on food and travel. Despite modest wage growth, real incomes remain under pressure, and consumer confidence has softened in recent weeks.
On the business front, higher operating costs—exacerbated by employer tax changes and rising commodity prices—are likely to be passed onto consumers. Many retailers and service providers are already signalling limited capacity to absorb further input cost shocks without revising prices.
Economic growth concerns
The unexpected rise in inflation comes as the economy continues to show signs of fragility. GDP contracted by 0.1% in May, the second consecutive monthly decline. Although employment remains stable, the growth outlook has weakened, and economists now see increased risk of stagnation over the coming quarter.
Balancing inflation control with economic support remains the Bank’s key challenge. Markets will look to July’s wage and CPI data for clearer indications on whether price pressures are broadening or easing.
Policy outlook remains uncertain
While most forecasts still point to inflation falling closer to 2.5% by early 2026, today’s data reinforce the risks of persistence. The Bank of England must now weigh the risk of delaying necessary stimulus against the danger of reigniting inflation.
For now, investors, businesses and households alike face an environment marked by uncertainty, with policy signals likely to remain data-dependent well into the second half of the year.
REFH – Newshub, 16 July 2025
Recent Comments