Rising food and motor fuel costs drove UK core inflation higher than expected in June 2025, prompting fears of stagflation in the economy and putting cash savings accounts under pressure.
In a fresh inflation bulletin Wednesday morning, the UK Office for National Statistics (ONS) said that core CPI inflation increased by 3.6% in the 12 months to June 2025, an increase on the 3.4% seen in the 12 months to May. The new figures were higher than expected. Markets had initially expected a 3.4% rise.
CPIH, a measure of inflation including housing costs, increased by 4.1% in the 12 months to June 2025, up from 4.0% in the 12 months to May.
The news comes as the UK economy shows worrying gross domestic product (GDP) performance in recent months, with a 0.1% fall in GDP in May. That followed a 0.3% decrease in activity in April. The price increase also means inflation is now higher than the interest rate offered by many savings accounts.
“There is a real threat of stagflation as the rate of inflation moves higher and the economy is stuck in the mud,” says AJ Bell investment analyst Dan Coatsworth.
“It puts the Bank of England in a tricky situation with regards to monetary policy decisions. If the return of higher inflation becomes a trend, then the Bank might find it hard to keep lowering rates at a decent clip.
“As it stands, the market expects an 81.9% chance of a rate cut in August, but there is a lot less confidence in future cuts. The latest inflation figures might encourage the Bank to sit on its hands and wait for more data to see if the spike in the cost of living is only temporary. However, its rate decisions are also influenced by what’s happening in the jobs market and the outlook is far from rosy.”
The ONS will publish fresh labor market figures tomorrow, which will indicate how much slack there is in the UK economy following increases to employer National Insurance contributions in April.
Markets seemed to shrug off the negative news. The UK FTSE 100 benchmark, fresh from its record high a day earlier, rose on Wednesday, while the pound increased against the dollar to buy $1.34 in early trading.
Which Prices Are Rising in the UK?
The rising costs of fuel and food contributed significantly to the increase in inflation, the ONS said. Though the price of petrol fell, it did not fall enough to offset increases elsewhere.
“Prices in the transport division rose overall by 1.7% in the 12 months to June 2025, up from 0.7% in the 12 months to May,” the ONS said.
“On a monthly basis, prices rose by 0.7% in June 2025, compared with a fall of 0.2% a year ago. The rise in the annual rate reflected a large upward effect from motor fuels,” the ONS said. The average price of petrol fell by 0.5 pence per litre between May and June 2025, but that compared with a larger fall of 3.0 pence per litre between May and June 2024.
Food costs are also still rising. The 12-month inflation rate for food and non-alcoholic beverages was 4.5% in June 2025, the ONS said – the third consecutive increase in the rate and the highest recorded increase since February 2024. On a monthly basis, food and non-alcoholic beverages prices rose by 0.3% in June 2025, compared with a rise of 0.2% a year ago.
How Are Investors And Savers Affected?
Apart from confirming that the cost of basic items is now significantly more expensive, Wednesday’s news means that inflation is now higher than the interest rate offered on many cash savings accounts.
According to Moneyfacts, the average rate offered on a cash account is 3.51%, 0.9% lower than the ONS’s latest inflation figures. That means many more savers could now be seeing the value of their cash accounts eroded by price rises. Shopping around for better deals could well benefit their financial position.
“Some of the best returns can currently be found with easy access accounts, but these rates are variable, and they are liable to be cut if the Bank of England lowers rates, as expected later this year,” says Moneyfacts spokesperson Caitlyn Eastell. As for those who are hoping for a lower base rate – and lower mortgage rates – they may just have to be patient, experts say.
“Today’s inflation figure of 3.6% is well above the Bank of England’s 2% target, but much of this is due to changes to energy price caps, the effects of which should wear off in the coming months, to the relief of investors,” says Morningstar chief European markets strategist Michael Field.
“We believe this is how the Bank of England will view the situation when making upcoming decisions on interest rate levels. Interest rates in the UK are the highest in the western world, so the bank has plenty of room for maneuver, even with elevated inflation in the short term.
“UK equity markets are trading at all time-highs. Lower inflation and interest cuts in the coming months should only add weight to investor confidence.”
