UK inflation falls by more than expected to 2.6% in lift for Andy Burnham

The new prime minister has pledged to bring down the cost of living to give households more disposable income and improve the outlook for the economy, announcing a winter VAT holiday on electricity bills and lowering the national cap on bus fares.

Last month’s consumer prices index reading outdid economists’ forecasts of a slide from 2.8% in May to 2.7% , amid a fall in the prices of fuel, particularly diesel, helped by the unstable truce in the Middle East conflict.

The Office for National Statistics said clothing also dropped in price month on month along with the cost of transport and food, offsetting modest price increases in most other goods and services.

Grant Fitzner, the ONS chief economist, said: “Food prices fell this month, driven by products including chocolate, margarine and beef. Clothing prices also fell with the start of summer sales, with bigger discounts than last year.

“The cost of raw materials dipped for the first time since January, mainly due to the lower price of crude oil, while the increase in the costs of goods leaving factories slowed again.”

The new chancellor, John Healey, said the drop in prices growth was “news families want to hear” but warned “there is much more to do to give people the breathing space they need”.

He added: “That is why yesterday we cut VAT on electricity bills and today we’re announcing a £2 cap on bus fares from January. We have chosen to focus on the cost of living in our first week, signalling that concern for working people will be at the heart of everything we do.

“Both these changes are a win-win. They help keep inflation down, while helping people afford the essentials.”

Joe Nellis, the economic adviser at the accountancy firm MHA, said the fall in inflation to 2.6% marked “a welcome piece of good news for the incoming prime minister and his chancellor as they look to set out their policy agenda”.

Nellis, an emeritus professor at Cranfield University, added: “The escalation of tensions in the Middle East in February led to fears of inflation spiralling out of control, as supply chains were disrupted and oil prices surged.

“However, while inflation has remained consistently above the Bank of England’s 2% target, it remains far below expected levels – in its world economic outlook published in April, the IMF predicted inflation to head towards 4% by the end of the year.

“For Andy Burnham, the easing of inflation creates a more stable platform for his fledgling administration. As he looks to support those struggling with the cost of living crisis and encourage job creation, lower inflation rates will help to improve household spending power and boost business confidence, as long as earnings growth continues to outpace price rises.”

Concerns that the Bank of England could increase interest rates later this month are likely to ease. Several members of the central bank’s monetary policy committee have said they are worried about inflation running persistently above their 2% target unless they push up interest rates from 3.75%.

However, the recent escalation of hostilities in the Middle East will pose a problem for Burnham and the central bank after it pushed the price of Brent crude back up above $90 a barrel.