What happened
UK inflation, the rate at which prices are rising, slowed to 2.6 percent in the year to June, down from 2.8 percent in May. Food price inflation eased to 1.7 percent, the lowest since August 2024, taking some pressure off weekly shopping bills.
Core inflation, which strips out volatile food and energy to show the underlying trend, held at 2.6 percent, down from 3.1 percent at the start of the year. Services inflation, a measure the Bank of England watches closely, edged down to 3.6 percent from 3.7 percent.
Against that backdrop the Bank of England kept its main interest rate, known as Bank Rate, unchanged at 3.75 percent at its late July meeting. The Bank has now cut rates by 1.5 percentage points in total since August 2024.
Why it matters
Inflation measures how fast the cost of living is climbing. At 2.6 percent prices are still rising, but far more slowly than during the cost of living squeeze, when inflation ran into double digits. A slower pace means pay packets stretch a little further.
The figure matters most for interest rates. The Bank of England target is 2 percent inflation, so with the rate close to but above target, policymakers are holding rather than rushing to cut further. That decision shapes the cost of every mortgage, loan and savings account in the country.
Wages are now growing faster than prices. Average pay excluding bonuses rose 3.4 percent over the year, which after inflation leaves households with a small real terms gain in spending power for the first time in a while.
Explained simply
Think of inflation as the speed of a car and interest rates as the brake. The car is still moving forward, but it has slowed from a dangerous sprint to a steady cruise, so the Bank is easing off the brake rather than slamming it.
When inflation was high, the Bank raised interest rates sharply to cool spending and bring prices under control, much like pressing hard on a brake. Higher rates make borrowing dearer and saving more rewarding, which takes heat out of the economy.
Now that inflation has slowed close to target, the Bank does not need to press as hard. It has already eased rates from their peak, but with inflation still a little above 2 percent it is pausing rather than cutting again, watching to see whether prices keep calming.
Services inflation is the gauge it studies most, because it reflects wages and domestic costs rather than global energy prices. Until that falls further, the Bank is likely to stay cautious about cutting.
What it means for you
For mortgage holders, a steady Bank Rate means the recent run of falling fixed deals is likely to level off rather than tumble further. A typical two year fixed rate is unlikely to move much while the Bank sits on its hands, so there is no urgent reason to rush a remortgage.
For savers, easy access accounts at major banks are still paying around 4 percent, but those rates tend to drift lower once the Bank signals further cuts. Locking into a fixed rate cash ISA now can secure a higher rate before any reductions arrive.
For shoppers, slowing food inflation at 1.7 percent means grocery prices are rising far more gently than before, though they are not actually falling. The weekly shop should feel less painful than it did a year ago.
The bigger picture
The UK has travelled a long way from the inflation crisis of recent years, when soaring energy and food costs pushed the rate into double figures. Getting it back near target has been the central task for the Bank.
The final stretch is often the hardest. Services inflation and wage growth remain a touch high, so the Bank is balancing the risk of cutting too soon against the danger of holding rates too high for too long. The next inflation reading and the September meeting will show which way it leans.
