The Consumer Price Index (CPI) has hit 3.6 percent, marking its highest level in 18 months. Rather unexpected by forecasters it is above the Bank of England target (2 percent) and above economists’ expectations of 3.4 percent. We now fall yet again into trying to balance dampening inflation while attempting to fuel economic growth.
While 3.6 percent is way above the target level for increasing interest rates, it is miles below the 11.1 percent CPI stood in October 2022, back when we had surging energy prices amid geopolitical tensions.
The 3.6 percent inflation rate was recorded last month (June 2025) with several factors have contributed to the upward drift.
Transport costs have been a major driver, with significant increases in airfares and rail fares, even as petrol and diesel prices have not fallen as sharply as expected. Food prices have risen at a faster pace as well, with a year-on-year increase of 4.5 percent, driven by higher costs for key ingredients like chocolate, butter, coffee, and meat.
Small yet significant, the increase in clothing prices along with a 6.7 percent rise in private rents have further fueled the inflationary pressures. These costs, though more dispersed across the economy, add up to stress household budgets. Recent tax increases have also contributed to the overall inflation rate by squeezing disposable incomes, even as wages have seen a moderate annual rise of 5.2 percent; barely keeping pace with the overall rise in the cost of living.
How Will The Government Respond To Rising Inflation Now?
Already in place are taxation adjustments and fiscal measures like extending the 5p fuel duty cut and freezing alcohol duty, but these don't account for current figures. The government is also taking steps to rein in public expenditure to reduce inflationary pressure without stifling future growth. However, things like reducing subsidies for energy bills aren't really helping, particularly with low-income households. This leaves a monetary policy response by the Bank of England.
Will Rising Inflation Now Raise Interest Rates?
Earlier in 2024, the BoE had raised interest rates to a 16-year high of 5.25 percent to slow accelerating prices. However, amid concerns about instead a slowing economy and two consecutive months of GDP contraction, the BoE pivoted strategy towards cutting rates. The base rate now standing at 4.25 percent as of May 2025.
Further adjustments will be due at its August 2025 meeting. Despite the inflation surge, several market analysts and expert commentators foresee the possibility of rate cuts as a strategic measure to stimulate economic growth. Expert emphasise that while an immediate rate cut is likely, the underlying inflationary signals necessitate a cautious approach. The probability of an August rate cut is 50/50.
Market expectations range from the anticipation of two more rate cuts in 2025, which would bring the base rate to roughly 3.75 percent. More aggressive forecasts suggest that three cuts could lower the rate to about 3.5 percent by year's end.