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- Author, Faisal Islam and Lora Jones
- Role, Economics Editor and Business Reporter, BBC News
Discounts on clothing in summer sales have helped offset the skyrocketing cost of hotel stays.
Overall, inflation rose to 2% in the year to June and was unchanged from May.
It means the cost of living is still rising, but at a pace the central bank is comfortable with, after nearly three years of above-target inflation has squeezed household finances.
The latest data showed that the cost of clothing and footwear fell last month, while food and drink inflation fell sharply from the highs of recent years.
Grant Fitzner, chief economist at the Office for National Statistics (ONS), told the BBC’s Today program that there was a “higher level of discounting”.
The figures also showed that the cost of used cars fell, but by less than the same period last year.
However, restaurant and hotel prices rose more than a year ago, putting some upward pressure on the headline inflation rate.
Hotel prices rose by 8.8% on the previous month, the ONS said, while prices in restaurants and cafes rose by 0.3% month-on-month.
The figures also showed that the cost of tours, cinemas, theaters and concerts was rising.
However, in areas such as services, which include everything from restaurants to hairdressers, price increases remain persistent.
This could raise questions for Bank of England policymakers about when they should start cutting interest rates.
Darren Jones, the new chief secretary to the Treasury, said family budgets across Britain were still being squeezed.
“We face a legacy of 14 years of chaos and economic irresponsibility. That is why this Government is now taking the hard decisions to fix the foundations so we can rebuild Britain and make every part of Britain better.”
The bank’s prime rate, which is used to set mortgage rates and other borrowing costs, is currently at a 16-year high of 5.25% after it was raised in a bid to counter surging inflation.
Its Monetary Policy Committee (MPC), which votes to set the rate, has held interest rates at this level for several months, but some economists predicted it would cut the rate at the next vote on August 1.
Leanne Morgan and her husband Gareth bought their house in Greenwich, south-east London, in 2016 when interest rates were much lower.
Their five-year fixed mortgage contract ended this month and their new rate is just above 4%, increasing their mortgage repayments by £5,200 a year.
Mrs Morgan said the higher mortgage payments limited the things they could do with their three older children.
“We can’t have family vacations, we haven’t done as much with the kids…it affects where I shop for food, I’m always looking for discounts. We sit together, see what our costs are, where we can cut and look at the budget.”
But she said she was optimistic the UK economy was past its worst and that better times were ahead.
“I think sometimes the doom and gloom that we talk about can actually make us feel very negative,” she said.
“But if we have a good conversation about what’s possible and work with what we have, we can talk about it better.”
The headline inflation rate has fallen sharply since October 2022, when it peaked at 11.1%.
However, some core measures of inflation closely watched by the Bank of England remain stubbornly high.
For example, services sector inflation remained at 5.7% in June, while core inflation, which strips out more volatile items such as energy prices, held at 3.5%.
A finely balanced decision
Along with some other stronger data on the economy in recent days, this may provide some food for thought for Bank of England policymakers who will decide on interest rates next month.
The International Monetary Fund on Tuesday listed the UK among countries that may need to keep interest rates “higher even longer” than originally expected to push inflation out of the system.
Markets had expected rate cuts to begin on August 1, which would help lower fixed mortgage rates.
The latest numbers suggest it will be a delicately balanced decision.
On Wednesday, investors trimmed bets on a rate cut, saying there was about a 35% chance – down from 50% before the data was released.
Fresh official housing market data has provided insight into the costs facing both buyers and renters.
They show that the rate at which UK rents are rising is close to a record high, reaching 8.6% in the 12 months to June.
The rate of growth slowed very slightly from the previous month, but remains well above the norm for the past 15 years or so.
House prices also rose by 2.2% in the year to May, the ONS said, with the average price of a house in England now above £300,000.
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