UK inflation has fallen to its lowest level in over a year, with a rate of 2.6 percent in June, down from 2.8 percent the previous month. This decrease is attributed to a drop in fuel prices, with diesel falling by 10.7p to 176.4p per litre and petrol dropping 2.1p to 155.3p. The decline in fuel prices has provided some relief for businesses that rely on vans, plant, or delivery fleets. However, this reprieve may be short-lived, as oil prices have jumped by around a fifth in the past month, which is likely to push inflation back up in the second half of the year.
The fall in inflation is largely due to external factors, with the decrease in fuel prices being the main driver. Food prices also fell, driven by products such as chocolate, margarine, and beef, while clothing prices decreased with the start of summer sales. Grocery price growth slowed to 1.7 percent over the year to June, which is the lowest annual food inflation rate since August 2024. This slowdown in food price growth will be welcome news for hospitality operators and food retailers who are working on thin margins.
Despite the fall in inflation, the underlying domestic price pressure remains sticky. Services inflation, which is closely watched by the Bank of England, only inched down to 3.6 percent from 3.7 percent. Core inflation, which strips out food and energy, was flat at 2.6 percent. This suggests that the fall in inflation is largely imported, and the domestic component has barely moved. As a result, the Bank of England's monetary policy committee is expected to leave interest rates unchanged at 3.75 percent.
The latest economic data has been welcomed by the new government, with the prime minister and chancellor highlighting the fall in inflation and the stable unemployment rate. The government has announced measures to help households, including cutting VAT on electricity bills and capping bus fares at £2. While these measures are aimed at households, they may also have a positive impact on businesses by supporting consumer spending. However, businesses should be cautious and plan for the rest of the year, taking into account the potential for rising oil prices and the sticky domestic inflation.
The impact of the government's measures on businesses is likely to be modest but real. The VAT cut on electricity bills will not apply to commercial supplies, and VAT-registered firms will reclaim the tax on energy in any case. However, the measures to support households may help to boost consumer spending, which could have a positive impact on businesses. The stable unemployment rate and the fall in inflation are also welcome news for businesses, but they should be aware that the cost of money and the cost of employing people remain unchanged. As such, businesses should plan for the rest of the year with caution, taking into account the potential challenges and opportunities ahead.
