The U.K.'s rate of inflation in June declined to its lowest level in more than a year after gasoline costs fell, raising the likelihood that the Bank of England will keep its key interest rate on hold next week, even with prices likely accelerating in the months ahead.

Consumer prices were 2.6% higher in June than the same month of last year, down from a 2.8% inflation rate in both April and May, the Office for National Statistics said Wednesday. That marked the lowest annual increase in prices since March 2025. Economists polled last week by The Wall Street Journal expected a reading of 2.7%.

The fall offers some positive economic news for Britain's new Prime Minister Andy Burnham days after he took office. Among his first policy announcements was a cut to value-added tax on utilities bills from October that could reduce around 0.1 percentage points of annual inflation, officials said.

Before that, though, inflation is set to climb over the summer after regulator Ofgem lifted the energy price cap for households by 13% at the start of July. The BOE expects inflation to peak at around 3.75% in the fourth quarter of this year.

Still, it was energy that dragged inflation down in June, coming in at 5.7% from 7.4% in May. On the month, motor fuel was 3.1% cheaper in June than May, as global oil prices fell as hostilities in the Middle East cooled.

"June's peace deal and the subsequent reduction in oil and gas prices helped cool CPI inflation. This will be a welcome figure to start the new prime minister's premiership, but the honeymoon period will be short-lived," said Charlotte O'Leary, associate economist at the National Institute of Economic and Social Research.

Burnham, in his first speech in the role outside Downing Street, vowed to help households with the cost of living. His government on Wednesday said it would cap most bus fares nationwide.

However, oil prices have climbed again this month after President Trump said the tentative ceasefire between the U.S. and Iran was "over" and airstrikes resumed. Brent crude rose above $92 a barrel on Wednesday, having fallen to prices lower than before the war earlier in July.

The slowdown in U.K. inflation was part of a broader trend, with similar declines recorded in the U.S. and the eurozone as prices of fossil fuels fell in response to hopes of a lasting reopening of the Strait of Hormuz. The eurozone's annual rate of inflation fell to 2.8% from 3.2%, while in the U.S. the pace of price rises cooled to 3.5% from 4.2%.

Before the conflict erupted, the BOE thought inflation would fall below its 2% target this year and investors had anticipated rate cuts. Now, markets price in two rate hikes between now and March 2027, though fully expect the central bank to hold its key rate at 3.75% next week.

"All in all, it is hard to see a meaningful hawkish pivot at the July meeting, barring a sustained rise in oil prices to close to $100 a barrel going into the meeting," said Bruna Skarica, chief U.K. economist at Morgan Stanley, in a note to clients.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

July 22, 2026 02:36 ET (06:36 GMT)

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