ImagesInflation in the UK was 2.6% in the year to June, lower than the previous month's figure, but still above the Bank of England's 2% target.The fall was slightly more than economists predicted, after the ceasefire in the Middle East – which has since broken down – temporarily caused a drop in petrol and diesel prices.But inflation is widely expected to rise again in the coming months. Inflation is the increase in the price of something over time. For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.How is the UK's inflation rate measured and what does it mean for UK interest rates?The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).This virtual "basket of goods" is regularly updated to reflect shopping trends, with alcohol-free beer, dashboard cameras, and pet grooming equipment among items added in 2026, while premium bottled lager and sheets of wrapping paper were removed.
The ONS uses price changes in the basket of goods over the previous 12 months to calculate inflation.The main inflation measure is called the Consumer Prices Index (CPI), and the latest figure is published every month. The Bank of England looks closely at the inflation figures when deciding whether to increase, lower or hold its base interest rate, which is currently 3.75%.Putting rates up makes borrowing more expensive, giving people and businesses less money to spend, reducing demand for goods and slowing price rises.But it is a careful balancing act – increasing borrowing costs also risks harming the economy.For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.What is happening to UK inflation?Although the June CPI figure of 2.6% remains above the Bank of England's 2% target, it is well below the 11.1% figure reached in October 2022.
That was the highest rate for 40 years.Although inflation has fallen significantly since then, prices have not fallen. They have just risen less quickly.The lower figure for June was caused by cheaper fuel prices at the pump, particularly diesel, summer discounts on clothing and falling food prices.Overall prices at the supermarket are rising at their slowest rate in nearly two years.Meat, particularly beef, and vegetable prices went up in June but the increase was smaller than that recorded in June 2025. The cost of some staples such as sugar, oils and dairy actually fell.But it can take a year for changes in the cost of food to filter through to the shop floor because of the way supply chains work, so prices could still rise as a result of the widespread disruption caused by the war in Iran.
How do energy prices affect UK inflation?Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.Before the war in the Middle East broke out, UK inflation had been expected to be at or around the target level of 2% over the next five years, according to the official forecasts published in March 2026.But in April, the Bank of England warned that disruption to global energy markets could push UK inflation as high as 6% in the worst-case scenario.When the latest ceasefire took effect, analysts said it could limit further inflation hikes. Oil prices initially fell sharply after the deal was announced, but have risen again since the US and Iran resumed attacks in the Strait of Hormuz in July. As a result, UK petrol prices are likely to climb back up.
This - coupled with the increase in household energy bills from 1 July when the new Ofgem price cap took effect - is expected to push UK inflation higher.The new Prime Minister Andy Burnham has announced that VAT on household electricity bills will be scrapped, but that will not take effect until October. It is predicted to have a small downward impact on inflation.Precisely because food and energy prices can be very volatile, the Bank of England also considers other economic measures such as "core inflation", which excludes these costs. Core CPI was also 2.6% in the 12 months to June, which was unchanged from May.Why are UK fuel prices rising again?What will the energy cap changes mean for my bills?What does an Andy Burnham-led government mean for your money?What is happening to UK interest rates and will they fall again?
The Bank cut interest rates six times between August 2024 and June 2026, which brought rates down to 3.75%, the lowest level since early 2023. In April, the Bank's Monetary Policy Committee indicated it would act "forcefully" if oil prices did not start to fall, with up to six rate hikes in a worst-case scenario.At its June meeting, just after a tentative agreement to re-open the Strait of Hormuz, the Bank held interest rates, but oil prices have since risen.Given the current uncertainty in the Middle East, many analysts expect the Bank to again leave rates unchanged at its next meeting on Thursday 30 July.Will UK interest rates go up?Are wages keeping up with inflation?The Bank also looks closely at what is happening to wages and unemployment. The latest official figures show that regular pay in the UK grew by very slightly more than inflation in the three months to May.Average annual growth in pay (excluding bonuses) during the three-month period was 3.4%, the same rate as the previous quarter.After taking inflation into account, it means regular pay grew by 0.1% between March and May.Separate ONS figures showed the estimated number of job vacancies in the UK fell by 7,000 to 712,000 in the three months to June 2026.The unemployment rate was 4.9% in the three months to May, which was unchanged from the previous three months.The number of payrolled employees has als
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