The UK’s annual inflation rate surged to a 16-month high of 3.6% in June, according to new figures from the Office for National Statistics (ONS), in a surprise uptick that has cast serious doubt over the likelihood of an interest rate cut in August.
Economists had widely expected inflation to hold steady at 3.4%, but the latest data points to renewed price pressures—particularly in transport and food—which have pushed up the headline Consumer Prices Index (CPI).
ONS acting chief economist Richard Heys said the primary driver was motor fuel prices, which fell only slightly last month compared to a much sharper drop during the same period last year. Food price inflation also rose for the third month in a row, now running at 4.5% year-on-year—the highest since February 2024.
The latest inflation reading suggests the Bank of England may now be forced to delay any further interest rate cuts. The Monetary Policy Committee (MPC) has already reduced rates twice this year, taking them from 4.75% to 4.25%. A further 0.25% cut in August had been anticipated by markets—but that now looks increasingly uncertain.
Services inflation, a key indicator used by the Bank to assess underlying domestic price pressures, rose unexpectedly from 4.6% to 4.7%, raising concerns that inflation is proving stickier than forecast.
Anna Leach, Chief Economist at the Institute of Directors, said: “This surprise uptick in CPI to 3.6% is a disappointment for households and businesses. Services inflation, in particular, will concern the Bank—it had been expected to remain flat. With borrowing costs still high and economic growth stagnating, the UK is skirting dangerously close to stagflation.”
She added that attention will now shift to upcoming labour market data.
“The MPC will need clear signs that wage growth is easing and second-round inflation effects are fading before it can justify another cut.”
Martin Sartorius, Principal Economist at the CBI, echoed the caution: “June’s stronger-than-expected inflation print raises concerns that recent price pressures—especially from energy bills and higher employment costs—could become embedded.”
While the CBI still expects gradual rate cuts, Sartorius noted that the MPC’s next move would be “finely balanced”, as some policymakers may fear loosening too early and allowing inflation to remain above the Bank’s 2% target for longer.
The Bank of England had previously forecast inflation would peak at 3.7% this summer before falling back towards target by early next year. But with both headline and services inflation running hotter than expected, the Bank may now have to reassess its timeline.
For businesses, the uncertainty around monetary policy will do little to ease planning concerns. For consumers, the cost-of-living squeeze is likely to persist, with food and transport prices continuing to bite.
With wage data due imminently and the Bank’s next interest rate decision just weeks away, all eyes are now on whether the MPC will choose to hold its nerve or hold its rates.