The rate of inflation unexpectedly jumped to an 18 month high of 3.6% in June as shoppers were hit by accelerating food and drink prices.
Most City forecasters had expected the Consumer Price Index - the headline measure of inflation - to stay unchanged from May’s 3.4%.
The Office for National Statistics (ONS) said the upward movement in the CPI to the highest level since January 2024’s 4% was the result of falls in fuel prices bottoming out, higher air fares, and rising supermarket prices.
One economist said the hotter than forecast inflation figures made “very grim reading.”
Food and drink prices were up 4.5% in the year to June, the third consecutive increase in the annual rate suggesting that the squeeze on household staples is far from over.
Earlier this month the British Food Consortium warned that hot, dry weather has reduced fruit and vegetable harvest yields, pushing prices higher.
Drought has also hit grass production leading to higher meat and dairy costs. Beef and veal prices were up 20.4% year on year according to the ONS, while lamb was up 16.2%. Butter was up 20% and chocolate was 16.3% dearer following a poor cocoa harvest.
The rise in employer National Insurance contributions in April is also being blamed for a spike in shop prices. One commentator said “awful April” had become “joyless June” for consumers.
The ONS also said there was a bigger than usual increase in air fares between May and June when they went up by 7.9%, compared with a rise of 3.2% between May and June 2024.
Fares usually rise in June, but the increase this year was the largest June rise since 2018.
Prices are still rising at a rate well above the Bank of England’s target of 2%. Nevertheless most City analysts still expect the Bank of England to cut interest rates again to 4% next month.
However there will be concern that core CPI - which excludes energy, food, alcohol, and tobacco - rose by 3.7% in the 12 months to June , up from 3.5% in the year to May.
Chancellor of the Exchequer Rachel Reeves said: “I know working people are still struggling with the cost of living. That is why we have already taken action by increasing the national minimum wage for three million workers, rolling out free breakfast clubs in every primary school and extending the £3 bus far cap. But there is more to do and I’m determined we deliver on our Plan for Change to put more money into people’s pockets.”
Professor Joe Nellis, economic adviser at accountancy firm MHA, said: “This is a reminder that while price rises have slowed from the highs of 2021-23, the battle against inflation is far from over and there is no return to normality yet — especially for many households who are still feeling the squeeze on essentials such as food, energy, and services.
“However, while the Bank of England is expected to take a cautious approach to interest rate policy, we still expect a cut in interest rates when the Monetary Policy Committee (MPC) next votes on 7th August.
“Despite inflation at 3.6% remaining above the official 2% target, a softening labour market — slowing wage growth and decreasing job vacancies — means that the MPC will predict inflation to begin falling as we head into the new year, justifying the lowering of interest rates.”
Alice Haine, personal finance analyst at online investment platform Bestinvest by Evelyn Partners said:“Rising inflation is rarely the news consumers want to hear, particularly for those whose finances are still suffering after the cost-of-living crisis and April’s raft of household bill hikes. Throw in the extended freeze on income tax thresholds, which results in people losing a higher proportion of their income to tax as their wages increase, and speculation that Reeves may break her pledge not to extend the freeze further, particularly for higher earners, and even the tiniest uptick in inflation can be unsettling.”
Matthew Ryan, Head of Market Strategy at financial services firm Ebury, said: “This morning’s inflation numbers make for very grim reading. Consumer prices are now growing at their fastest rate since January last year, and at almost double the pace targeted by the Bank of England.
“While rising household energy bills are partly at play, we also lay the blame on labour cost pressures emanating from April’s hike to the minimum wage and business tax rates, which are forcing employers to raise prices to cover the increase in cost. “
Suren Thiru, Economics Director at accountancy body ICAEW, said: “These figures confirm that cost pressures on households and businesses remain disconcertingly high as rising fuel and food prices helped drag inflation further away from the Bank of England’s 2% target.
“While strong services and core inflation suggest that underlying price pressures remain a little too sticky, the squeeze from a flagging economy and weakening jobs market should put them on a downward path.
“June’s uptick is the start of a slight summer surge in inflation with skyrocketing business costs and global trade turbulence likely to lift the headline rate moderately higher by the autumn, despite July’s drop in energy bills.”
