UK inflation experienced a slight decrease in June 2026, though an anticipated rise in energy costs could reverse this trend. Official forecasts published in March 2026 had projected inflation to be at or near the target level of 2% over the subsequent five years.
However, in April, the Bank of England cautioned that disruptions to global energy markets could escalate UK inflation to as high as 6% in a worst-case scenario. The conflict in the Middle East and subsequent actions in the Strait of Hormuz have contributed to oil price volatility. While oil prices initially fell after a ceasefire announcement, they have since risen again due to renewed attacks.
This expected increase in oil prices, coupled with higher household energy bills effective from July 1 due to the new Ofgem price cap, is poised to drive UK inflation upward. Prime Minister Andy Burnham has announced the abolition of VAT on household electricity bills, a measure set to take effect in October. This change is predicted to have a modest downward impact on inflation.
Because food and energy prices are inherently volatile, the Bank of England also monitors "core inflation," which excludes these costs. Core CPI remained unchanged at 2.6% in the 12 months leading up to June, the same rate as in May. The annual inflation rate, as measured by the Consumer Price Index, stood at 2.6% in the year to June 2026. This follows a period where inflation had fallen to a low of 1.7% in September 2024, after reaching a peak of 11.1% in October 2022. Earlier in 2020, inflation had been around 1.8% before dropping close to 0% by late 2020.
Interest rates, which had climbed to a high of 5.25% in August 2023, were reduced to 3.75% by April 2026, a level at which they have remained since the Bank of England's latest meeting on April 30, 2026. These rates had gradually increased from 0.1% in January 2021. The Bank of England's inflation forecast had been predicated on assumptions of stable global energy markets, but the current geopolitical landscape has introduced significant uncertainty. Analysts had suggested that the latest ceasefire could limit further inflation hikes, but the resumption of attacks has altered this outlook, potentially leading to higher petrol prices and increased overall inflation. The inclusion of new items in the official inflation basket, such as houmous, dashboard cameras, motor homes, alcohol-free beer, and pet grooming services, reflects evolving consumer spending patterns.```jsonjson{