Food prices have fallen – but inflation expected to rise from here

Food prices are rising at their slowest rate in nearly two years, as the cost of staples such as margarine and sugar has gone down.

Supermarket price wars have helped drive down prices in the year to June, the industry says, as retailers work to tempt customers with summer deals.

Inflation in the UK overall has fallen to 2.6% in the year to June, down from 2.8% in the year to May, according to the Office for National Statistics (ONS), driven largely by lower fuel and food prices.

June's figure will be welcomed by new Prime Minister Andy Burnham and his government, but analysts warn the fall is temporary, as higher energy prices in July are expected to push inflation back up.

Lower fuel costs also pushed inflation down, with prices at the pump falling for the first time since the start of the war in the Middle East.

Clothing costs fell as well due to the summer sales, with many retailers offering larger discounts than last year.

Food and non-alcoholic beverage inflation fell by 0.2% month-to-month, with sugar, chocolate and confectionery seeing the largest drop in price.

Meat, particularly beef, and vegetable prices rose in June but the increase was smaller than the same time last year. Prices of oils, fats and dairy fell in June, compared to a year previously.

Food inflation often has a lag of up to 13 months due to the supply chain, so any effects from the war in Iran could still be yet to come.

Fuel prices at the pump fell in June after the US and Iran agreed to halt military operations and allow the key Strait of Hormuz to re-open.

But the recent resumption of hostilities and a new jump in crude oil prices means inflation could spike again in the coming months.

The British Retail Consortium (BRC) said lower food inflation was driven by "intense competition between supermarkets".

"If retailers are to keep prices affordable for consumers in the long run, the Government needs to take practical steps to lower the everyday cost of doing business," BRC economist Harvir Dhillon said.

"Andy Burnham has taken immediate action to ease pressure on household budgets; he must now look to do the same for businesses."

The new prime minister has pledged to make the cost of living a priority for his government, and new Chancellor John Healey said the lower rate of inflation was "news families want to hear" but "there is much more to do".

The government announced on Wednesday morning that the bus fare cap in England will be brought back down to £2 in January.

That was after Burnham announced that VAT on domestic electricity bills would be scrapped for the rest of the year from October.

Healey said: "Both these changes are a win-win. They help keep inflation down, while helping people afford the essentials."

The latest inflation figure is still above the Bank of England's target of 2%, but Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said a rate increase when the Bank meets next week is unlikely.

"Rate-setters may want to assess the impact of any measures announced by the new Prime Minister before deciding whether to tighten policy again," she said.

She added that rising inflation will "likely become a more notable economic headache" for Healey, "squeezing his fiscal headroom, raising borrowing costs, and increasing financial market volatility".

Yael Selfin, KPMG's chief economist, said the June figure is likely to be the lowest of the year.

Higher energy bills, brought about by a rise in Ofgem's price cap, will likely push inflation up again, she said.

"Although the impacts from the initial energy shock have so far been relatively limited, if energy prices remain high for longer, second-round effects risk feeding through into wages and more broadly across the economy."

Sarah Coles, head of personal finance at AJ Bell, said: "The markets are still only expecting a single rate hike by the end of 2026, but it's expected to hit in September, with another potentially following in February.

"It means the most generous rates are likely to edge up. If you're in the market for a new savings account, it's worth keeping your eye open for a bargain and acting fast while it lasts."

But she added: "There's miserable news for anyone in the market for a new mortgage. Mortgage rates had been falling across the board, but this week has seen them jump significantly."