UK inflation slowed more than expected last month, driven by a drop in petrol prices following the temporary ceasefire in the Iranian war, but the decline gives new Prime Minister Andy Burnham only limited breathing space in his efforts to ease living costs.

The Office for National Statistics announced on Wednesday that consumer prices rose by 2.6% year-on-year in June, the slowest rate since March 2025, compared with 2.8% in May.

A Reuters poll of economists had forecast inflation slowing to 2.7% in June, as the sharp rise in energy prices caused by the Iranian war receded during the month after a ceasefire took effect. However, the resurgence of conflict since then has driven energy costs higher again.

Grant Fitzner, chief economist at the Office for National Statistics, said: "Falling motor fuel prices, particularly diesel, helped cool inflation in June."

The cost of raw materials also fell for the first time since January, driven mainly by lower crude oil prices, while factory input cost inflation slowed.

Britain's inflation rate in June was lower than those in the United States and the euro zone, which stood at 3.5% and 2.8% respectively.

The sharp rise in energy prices had a greater impact on Britain due to its reliance on natural gas imports.

UK inflation has remained above the Bank of England's 2% target for most of the past five years, while the central bank expects it to rise to 3% in the third quarter.

Wednesday's data showed services inflation, which the Bank of England closely monitors as a key indicator of underlying price pressures, slowed to 3.6% in June from 3.7% in May, but came in slightly above economists' forecast of 3.5%.

Investors expect the Bank of England to keep its main interest rate unchanged at 3.75% at its meeting next week, as it continues to assess the economic impact of the conflict in the Middle East.

Yael Selfin, chief economist at KPMG, said: "Today's data reinforces the Bank of England's cautious approach, as underlying inflationary pressures remain relatively limited amid weak domestic demand."

Some members of the Monetary Policy Committee, who voted to raise interest rates in June, remain concerned about the persistent risk of inflation staying above the 2% target.

Financial markets had anticipated, on Tuesday, one or two quarter-point interest rate increases by the end of 2026.

Data from the Office for National Statistics last week showed a slight improvement in the UK economy in May, easing some of the pressure on Burnham, who became prime minister on Monday.

Since taking office, his government has announced tax cuts on energy bills and a reduction in the cap on bus fares.

Tuesday's data also showed signs of labor market stability in recent months, alongside a decline in government borrowing in June.