UK inflation drops to a 15-month low; delayed energy effects may indicate June as the annual trough

1. The UK's consumer price index (CPI) rose 2.6% year-on-year in June, down from 2.8% in May, marking the lowest level since March 2025. This decrease was mainly driven by month-on-month declines in car fuel and food prices, providing a temporary relief in household living cost pressures. 2. Petrol prices fell between May and June, with diesel prices showing an even more pronounced decline, representing the first monthly adjustment in fuel prices since the outbreak of geopolitical conflicts at the end of February. However, overall energy prices remain significantly higher than the same period last year. Food and soft drink prices also saw a slight month-on-month decrease, as fierce competition between supermarkets combined with warmer weather put downward pressure on prices. 3. Nonetheless, economists widely warn that June may be the lowest point for inflation this year. In July, the UK gas and electricity regulator will raise the price cap by about 13%, which will increase the typical household's annual energy bill. This mainly reflects how the Middle East situation has driven up wholesale prices, and the full transmission of energy costs has yet to be seen. 4. The latest forecast from the Bank of England expects CPI to rise to a peak of around 3.25% by the end of 2026. ING economists predict that inflation may approach 3.5% by the end of this year or early next year. The energy market remains highly sensitive to developments in the Middle East, and higher energy costs will gradually spread to a broader range of goods and services. 5. The new Prime Minister has made living costs a priority, announcing the abolition of VAT on household electricity bills from October, which is expected to reduce CPI by about 0.1 percentage points. There are also plans to reinstate the cap on bus fares from January next year. These minor fiscal relief measures are unlikely to offset the delayed effects of the energy shock. 6. The inflation slowdown has temporarily reduced the pressure on the Bank of England to raise rates next week. The market expects rates to remain unchanged at 3.75%, marking the fifth consecutive hold. However, if subsequent energy cost transmission pushes inflation above expectations, the central bank may still be tested to tighten policy again.