Imagine “Don’t Panic” in large friendly letters – the pink ones that fans of The Hitchhiker’s Guide to the Galaxy will know well – when you read that inflation did the dirty on us last month, coming in at 3.6 per cent.
The last few weeks have seen Bank of England governor Andrew Bailey dropping hints about rate cuts, even suggesting that the rate setting Monetary Policy Committee (MPC) could go further and faster if the jobs market continues to deteriorate.
But June’s inflation spoiled the party, hitting a near 18 month high, well ahead of the City’s consensus forecast compiled by Reuters. It called for 3.4 per cent, which is also what the Bank expected.
Prices in the UK are running hot – far hotter than in Germany (2 per cent), or France (0.8 per cent). With inflation at 2 per cent for the Eurozone as a whole, the European Central Bank’s refinancing rate sits at just 2.15 per cent, making life much easier for the economies of those countries when compared to the welter burden of base rates at 4.25 per cent the British economy is struggling under.
Houston, do we have a problem? You could be forgiven for thinking as much, assuming the Office for National Statistics got its sums right (it didn’t in April).
The transport sector, where inflation more than doubled to 1.7 per cent, was identified as the chief villain. Motor fuel was a big contributor to that. But there were other nasties – the cost of clothing and footwear, for example, rose by 0.5 per cent in the 12 months to June 2025, compared with a fall of 0.3 per cent in the 12 months to May. Hot weather and retailers, struggling under the weight of higher costs, decided they could ditch discounting amid high demand from consumers seeking warm weather gear.
Food prices showed a 4.5 per cent rise against the previous month’s 4.4 per cent, the third consecutive increase. So much for the supermarket price war. The number, said the ONS, is still “well below the peak seen in early 2023”, when it was nearly double that. Well, phew. But, no, wait just one moment. These numbers are cumulative. This lastest rise comes on top of what has already been banked. So that’s not really much comfort, especially to people on limited budgets struggling to make ends meet.
“I know working people are still struggling with the cost of living,” said the chancellor, Rachel Reeves. Really? Unless you’ve been at the sharp end, unless you know what it feels like to wonder how you’re going to feed your kids, you really don’t.
The bankers gave a rousing cheer to the Chancellor’s (high risk) deregulation plans at the annual Mansion House dinner the night before the ONS delivered a hangover from hell. They can easily weather this storm. The problem for Reeves, and the Labour government as a whole, is that they won’t decide the result of the next election.
Service price inflation – long a concern for the MPC – stayed high at 4.7 per cent, but at least didn’t increase. The closely watched core inflation, which strips out the volatile categories including food, energy, and tobacco, however, ticked up to 3.7 per cent from 3.5 per cent. So there was no comfort there.
At this point, you’re probably wondering how on earth I could say “don’t panic” at the outset. True, it’s not a pretty picture – and it will provide fresh meat for the rate hawks on the MPC. I can see as many as three voting “hold” at the next meeting (my bet is on external members Catherine Mann and Megan Greene; and the Bank’s chief economist Huw Pill).
But here’s the thing: the economy has started to struggle, badly. It shrank April and May, undershooting expectations in the process. The labour market has been buckling under the weight of Reeves increasing employer national insurance contributions – and wage settlements have started to decline.
The latest evidence of that came courtesy of the regular KPMG/REC Report on Jobs, released at the start of the week. It found that permanent staff appointments fell at the steepest rate for nearly two years in June, while candidate availability increased at the sharpest pace since November 2020. That, remember, was when the pandemic was still raging. More people fighting for fewer vacancies means employers can – and will – pay less.
Inflation is already expected to fall later in the year, but fewer jobs and lower wage settlements will combine to further reduce price pressures in the economy. Despite this, the UK’s monetary policy remains restrictive. That being the case, the MPC could (and should) cut in August and follow it up soon after.
So remember those friendly pink letters: don’t panic. Borrowing costs are going to fall. Hopefully.
