Inflation in June unexpectedly jumped to 3.6%, up 20 basis points from May’s figure of 3.4%, as forecasters brace for a sustained rise over the next half of the year.
The uptick in month-on-month inflation in June came largely from the increasing price of transport, particularly in the increased cost of motor fuels, according to the Office for National Statistics (ONS).
June also saw an increase in the cost of air and rail fares, and food inflation was at the highest level in 16 months, growing to 4.5% on the year.
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Unfortunately for households and businesses across the country, forecasters do not think we are out of the woods quite yet.
As the year progresses, the headline figure of inflation (as measured by the Consumer Prices Index) is expected to swell in the third quarter of 2025.
Since the start of the year, the Bank of England has expected inflation to increase as the year progressed, and so far they have been broadly correct.
The central bank expects inflation to peak this year in September, forecasting CPI to climb to around 3.7%, according to the minutes of the Monetary Policy Committee’s (MPC) June meeting.
Outside of the rise in September, the MPC expects CPI to remain just under 3.5% for the rest of 2025.
The central bank’s inflation expectation is slightly higher than the average expectation among forecasters surveyed by the Treasury, who expect inflation in the fourth quarter of 2025 to be 3.2%.
When will inflation go down?
Amid dreary inflation forecasts, there is, thankfully, a light at the end of the tunnel.
Though the central bank said in June that inflation “is expected to remain broadly at current rates throughout the remainder of the year,” they do expect it to get closer to the 2% target in the first months of 2026.
The average expected inflation reading for 2026 among forecasters surveyed by the Treasury is also 2.3%, much closer to the 2% target than today.
What’s more, the Office for Budget Responsibility (OBR), the UK’s official fiscal watchdog, estimated in May that inflation will be 3.1% in Q4 2025, before tumbling down to 2.6% in Q1 2026, and 2% in Q2.
These forecasts all point to a fall in inflation over the remainder of 2025 which continues into the start of 2026 – a return to the 2% is still some time off, but seems on the horizon.
If inflation is set to rise, why is the Bank of England lowering interest rates?
Inflation rising above the 2% target is always a cause for concern for economists, policymakers, and consumers.
Policymakers at the Bank of England are particularly concerned about inflation figures as it is the one of the jobs of monetary policy to guide and control inflation so prices do not spiral out of control.
This is largely done through influencing interest rates which are typically raised to fight inflation.
However, despite inflation being forecast to remain high this year, the Bank of England has been gradually cutting rates since the summer of 2024.
The Bank of England says their approach is “gradual and careful”, emphasising that the MPC is alive to concerns about the inflationary effects of rate cuts.
However, while rate cuts were easier to justify in the first half of 2025 thanks to lower inflation figures, it is increasingly hard to justify them as inflation rises.
Rob Morgan, chief investment analyst at Charles Stanley, says increases to the minimum wage and payroll taxes will “likely to keep inflation significantly over 3% for the rest of the year, making it difficult for the BoE to cut interest rates aggressively.”
Despite this, anaemic domestic economic growth and a slowing jobs market means the central bank is still under pressure to keep cutting rates amid a high inflationary outlook.
A cut is therefore still expected when the MPC meets on 7 August.
Sanjay Raja, chief UK economist at Deutsche Bank, says “there's enough of a slowdown in GDP and the labour market to warrant a 'gradual and careful' easing of monetary policy”.
He added: “But the onus now rests on the labour market to shape how far and how fast the MPC can cut this year and next.”
Beyond an expected cut in August, forecasters are divided over whether interest rates will be lowered again in subsequent MPC meetings.
Global bank ING is in line with traders who expect two more interest rate cuts this year in August and November, while Deutsche Bank expects three this year.
Contrary to most forecasters, macroeconomic research provider Pantheon Macroeconomics expects just one more interest rate cut this year, happening in August.
Robert Wood, chief UK economist at Pantheon, said “we expect headline inflation to run above 3% until next April, and above target throughout 2027 too. The MPC no longer has the luxury of simply looking through inflation.”
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