UK inflation posts surprise increase in June

Britain’s annual inflation unexpectedly climbed to 3.6% in June, the highest level in over a year, potentially complicating the Bank of England’s decision to cut interest rates at its upcoming meeting.

The June Consumer Price Index (CPI) reading surpassed expectations of a steady 3.4%, marking the highest annual rate since January 2024.

Service price inflation—a key metric watched by the Bank of England as a better gauge of domestic inflationary pressures—held steady at 4.7%, defying forecasts for a dip to 4.6%.

The rise in inflation was driven mainly by higher costs for motor fuels, air and rail fares, as well as an uptick in clothing and footwear prices.

UK inflation has been on a steady upward trend since hitting a three-year low of 1.7% last September. In May, the Bank projected inflation would peak at 3.7% by September, nearly double its 2% target.

A sharp increase in April—from 2.6% to 3.5%—was fueled by regulated energy and water price hikes, elevated airfares, and increased costs in labor-intensive services following employment tax and minimum wage rises.

Despite the latest data, Bank of England Governor Andrew Bailey has maintained that interest rates are expected to follow a gradual downward path, citing weakening labor market conditions and subdued economic growth as dampening forces on wage pressures.

The BoE has already cut interest rates by four quarter-point increments since August. Economists surveyed by Reuters last month anticipate two additional cuts this year, including a likely move in August.