UK inflation fell more than forecast in June on cheaper petrol

[LONDON] Cheaper motor fuel helped bring down UK inflation to the lowest in over a year, delivering some relief for households as new Prime Minister Andy Burnham promises to tackle the cost of living. 

Consumer prices rose 2.6 per cent in the 12 months to June, an easing from the 2.8 per cent increase the previous month, the Office for National Statistics said on Wednesday (Jul 22). It was the lowest inflation rate since March last year and below the 2.7 per cent economists were expecting on average.

Petrol and diesel costs fell last month after crude oil tumbled amid hopes of an end to the US-Iran war. Other downward pressures on prices came from food and non-alcoholic drinks. Services inflation – a sign of domestic pressures being watched closely by the Bank of England (BOE) – slowed to 3.6 per cent from 3.7 per cent, slightly higher than forecast.

Living costs are a top priority of the new Labour administration with Burnham promising to provide families “breathing space.” In one of his first acts as premier, he announced the removal of value-added tax on household electricity bills from October, support the government estimates will reduce inflation by around 0.1 percentage points.

However, the respite for consumers from falling inflation may be brief with economists expecting inflation to tick up in July when Britons were hit by a 13 per cent increase in the price cap that sets household energy bills. With hostilities between the US and Iran escalating once again, crude oil is back above US$90 a barrel and gas prices have risen sharply in recent weeks, threatening to undercut the savings from Burnham’s support.

Still, inflation is running well below the levels the BOE had feared in the early months of the Middle East conflict. Weekly government data shows UK petrol prices have eased to around 152 pence per litre, 4 per cent below the peak in late May.

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The BOE is widely expected to keep interest rates on hold next week as it tries to balance the threat from higher energy prices against a weak labour market and sluggish economic growth. It will provide a new set of full forecasts alongside the decision on July 30, with markets currently pricing in one rate increase this year and a 60 per cent chance of a second. BLOOMBERG