Economic update: The new Prime Minister, inflation and the cost of living

Since taking office on 20 July, the new Prime Minister Andy Burnham has repeatedly said that his government will help with the cost of living. When addressing his cabinet at their first meeting, Mr Burnham said that “we need to be a cost of living government and getting that cost of living down.”

This month’s economic update provides a summary of the policy announcements on the cost of living since the new Prime Minister took office, as well as examining recent developments in and forecasts for UK inflation, including the impact of the conflict in the Middle East.

Burnham government’s measures on the cost of living

During Andy Burnham’s first week as Prime Minister, the government announced the following policies designed to reduce pressure on household budgets:

• Removing the 5% VAT rate on domestic electricity bills in Great Britain from 1 October 2026, when Ofgem’s energy price cap is next due to change. The government estimates this will reduce the average annual bill by around £45. The policy will apply until the end of the 2026/27 financial year in March 2027. Any changes beyond that are likely to be announced at the Budget in the autumn.
• Capping single bus fares in England, outside of London, at £2 from 1 January 2027 until the end of 2027. The existing fare cap of £3 will remain in place for the rest of 2026. The government will also continue with the scheme announced in May to provide free bus travel for children aged 15 and under in England during August 2026.

In addition, the government announced a 20% reduction in business rates for pubs, social clubs and live music venues in England for 2027/28. The government estimates that this relief will reduce the amount of business rates a typical pub pays by around £1,100 in 2027/28. This is in addition to the existing 15% relief in 2026/27. The new 20% relief will not apply to the “very largest music venues”, with details available at the Budget.

The Prime Minister has said that these policies are relatively small, but are intended to create “some breathing space” and to show “the direction of travel and that we’re serious about helping [people] out”. He has said that his government will introduce a 10-year plan for Britain later this year.

How much prices have gone up in recent years

A regular survey of the public by the Office for National Statistics (ONS) has consistently found the cost of living cited as one of the most important issues facing the UK. In June 2026, 88% said it was an important issue, with the NHS second at 78%.

In every survey since this question was first asked in October 2022, at least 84% of the survey respondents cite the cost of living as an important issue facing the UK.

This can probably be explained by the period of historically high inflation seen in the UK from 2021 to 2023 and, after easing somewhat in 2024, rising inflation in 2025.

While inflation is typically reported as the change in average prices over the past year, the cumulative effect of price increases over a longer period of time provides a more complete picture of the changes to the cost of living.

As shown in the chart below, UK consumer prices rose by 30.7% from January 2021 (before the period of high inflation began) to June 2026 (the most recent data we have). For context, in the previous five-and-a-half-year period, from August 2015 to January 2021, prices rose by a total of 8.7%.

Source: ONS, CPI level, series D7BT monthly data to June 2026

Research suggests that food prices play a large role in shaping people’s perception and expectations of inflation. From January 2021 to June 2026, the same period used above for overall prices, food prices rose by 39.3%, as shown in the chart below. For context, in the previous five-and-a-half-year period, from August 2015 to January 2021, food prices rose by a total of 3.9%.

Source: ONS, CPI level, series D7BU monthly data to June 2026

Recent developments in inflation

The inflation rate – the annual percentage change in UK consumer prices – has generally been falling since autumn 2025. It was 2.6% in June 2026, the lowest since December 2024.

However, before the start of the US–Iran conflict in the Middle East on 28 February 2026, it was widely expected that inflation would fall to around 2% from April and remain there for the rest of 2026. This would have been the first time since mid-2024 that inflation was at 2%.

The rise in energy prices resulting from the conflict led to higher petrol and diesel prices in the UK, while household energy bills also increased. This has kept overall inflation higher than it otherwise would be, with motor fuels contributing 0.6 percentage points to the overall 2.6% inflation rate in June.

However, several indicators suggest that inflationary pressures (the factors known to drive inflation) within the UK economy have eased: the labour market is relatively subdued, with fewer vacancies and slowing private sector wage growth, and underlying GDP growth is modest. This suggests external factors, particularly related to the knock-on effects from the Middle East conflict on energy markets, are playing an important role in keeping inflation above the Bank of England’s 2% target.

For instance, on 30 July the Bank of England’s Monetary Policy Committee said inflation had been on the way down before the conflict and noted “abating domestic inflationary pressures”, referring to slowing wage growth and a “soft labour market”.

Inflation is likely to rise

The volatility in international energy prices during July – mirroring the unpredictable developments in the Middle East – means there is a great degree of uncertainty about the future path of UK inflation.

On 30 July, the Bank of England released new economic forecasts, with a central forecast of inflation rising to 3.2% by October and staying above 3% until the third quarter of 2027. This was based on energy prices from mid-July.

Note: ONS monthly outturn data up to June 2026; BoE quarterly forecasts from July 2026 MPR central scenario
Sources: ONS, CPI series D7G7 and Bank of England, Monetary Policy Report, July 2026

Higher wholesale UK natural gas prices mean the household energy price cap set by Ofgem every quarter is likely to rise in October compared with July, according to the energy consultancy Cornwall Insight. This is despite the government’s planned removal of the 5% VAT rate on domestic electricity, illustrating the difficulty of offsetting broader inflationary pressures with targeted policy measures.