The Office for National Statistics has reported a surprise rise in UK inflation, with the Consumer Prices Index (CPI) climbing to 3.6% in June, higher than the 3.4% recorded in May. This monthly increase was unexpected, as many City economists and the Bank of England had forecast inflation would hold steady.
The increase was primarily driven by petrol and diesel prices. Although prices still declined year-on-year, the drop in June 2025 was smaller than in June 2024. Petrol prices fell to 131.9p per litre, a modest 0.5p decrease from May, compared to a larger 3p fall between May and June 2024. Diesel prices fell too, but again less significantly: a 0.6p monthly decline in June 2025 versus 4.8p in June 2024. These smaller drops translate into less downward pressure on inflation, contributing to the overall upwards movement.
Food inflation hits 4.5%
Food and drink prices rose by 4.5% year-on-year in June, the highest rate since February 2024. Significant contributors included staples such as cakes, meat, milk, eggs and cheddar cheese. This marks the third consecutive month of rising food inflation, weighing heavily on household budgets.
Services inflation stays high
Services inflation, an indicator of domestic price pressures, remained stubbornly high at 4.7% in June. The rise was driven in part by the largest increase in air fares recorded in June since 2018. Economists had expected services inflation to ease slightly to 4.6%, so the hold at 4.7% was another surprise.
This inflationary uptick places added pressure on Chancellor Rachel Reeves, whose economic stewardship is under increasing scrutiny. Labour recently announced a £25bn rise in employment taxes, which business groups warn could force firms to cut jobs or pass on costs to consumers. Indeed, early signs suggest this is already happening, with rising restaurant prices, pricier hotel stays and costlier supermarket goods.
Kris Hamer, director of insight at the British Retail Consortium, commented: “Despite fierce competition between retailers, the ongoing impact of the last Budget and poor harvests caused by the extreme weather have resulted in prices for consumers rising.”
Shadow Chancellor Mel Stride criticised Labour’s fiscal strategy, saying: “Labour’s decision to tax jobs and ramp up borrowing is killing growth and stoking inflation – making everyday essentials more expensive.”
Government response
In her Mansion House speech, Chancellor Reeves acknowledged the economic challenges, pointing to two months of negative growth and rising inflation. She pledged renewed efforts to stimulate growth through the cutting of red tape and boosting worker incomes. Measures include raising the national minimum wage for 3m workers, introducing free primary school breakfast clubs, and extending a £3 bus fare cap. “I know working people are still struggling with the cost of living,” Reeves stated. Nevertheless, critics argue that recent fiscal decisions may have exacerbated inflationary trends.
The Bank of England has already cut its base interest rate four times over the past year, most recently in May, when it was reduced to 4.25%. Though policymakers are inclined to ease further due to the weak economy, persistently high inflation figures could delay future rate reductions. Threadneedle Street predicts inflation will peak at 3.7% in September, nearly double the Bank’s 2% target.
Economists note that while the high June inflation may not derail an August policy move, it is likely to make the Bank more cautious in setting the pace and timing of further cuts. Suren Thiru, Economics Director at the Institute of Chartered Accountants in England and Wales, observed: “While June’s hot inflation won’t deter policymakers from sanctioning an August policy loosening, given mounting worries over economic conditions, these figures may increase caution over the pace of future rate cuts.”
Official data due this Thursday is expected to show further cooling in the labour market for the three months to May, underscoring worries about the broader economic outlook. Alongside global trade concerns, such as Donald Trump’s erratic trade policies, the UK economy faces headwinds from within and abroad.
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