CPI inflation fell from 2.8% in May to 2.6% in June, helped by lower transport and fuel costs.
However, an escalation in attacks in the Gulf, alongside the increase in the Ofgem price cap, threaten to push prices higher in the coming months.
Core inflation remained at 2.6% in June, highlighting persistent underlying price pressures, while services inflation eased only slightly and remains stickier than expected.
The Bank of England is still expected to hold rates steady this month, but policymakers will be watching geopolitical risks closely.
Susannah Streeter, chief investment strategist at Wealth Club, commented: “UK inflation has eased to 2.6% in June, with some of the heat coming out of rapidly rising prices, offering some short respite for households and pushing the threat of interest rate hikes a little further into the distance. The fall was steeper than some forecasts, but it's still above the bank's 2% target.
"Also, it's not likely to be long before the temperature rises again, with fresh attacks in the Middle East and the Black Sea threatening to keep prices on the boil.
"While the fall in the headline rate is welcome news, stubbornly high core inflation, a sluggish economy and the Middle East crisis are set to keep Bank of England policymakers on alert. However, it still looks likely they'll adopt another wait-and-see stance at the meeting later this month, with an interest rate hike not fully priced in until close to the end of the year."
John Phillips, CEO of Just Mortgages and Spicerhaart, said: “While inflation easing may seem like the first win of the new Burnham premiership, it’s more likely to be a false dawn as improving food and fuel prices mask what is still a really difficult picture. In truth, many economists roughly expected today’s result and are already looking ahead to next month’s reading which will take into account the higher energy price cap, as well as the re-escalation of the conflict in Iran.
“Even with positive news today, a rate cut next week is far from anyone’s prediction. The most likely outcome is another hold, which will be certainly welcome over the other alternative. How long the central bank will keep to this path is yet to be seen, especially given what is happening in the Middle East – which has already helped push up swaps and forced many lenders to reprice."
Emma Hollingworth, chief distribution officer at LSL Financial Services, commented: "Today's shock fall in inflation is a welcome surprise and there's no doubt that it gives the Bank of England some increased breathing room in terms of interest rates.
"But how long that lasts is anyone's guess. The renewed trouble in the Middle East has stoked fears of another bout of inflation, particularly if the Strait of Hormuz, a key artery in the global trade network, remains under threat. For borrowers, what happens to that shipping lane could have major ramifications on the cost of borrowing this year.
"The longer the conflict goes on, the more those inflationary pressures will build. Some forecasters already see inflation topping 4% by this time next year, which is a very different conversation to the one we were having a few months ago.
"We don't expect the Monetary Policy Committee (MPC) to move this month. But borrowers hoping for cuts later in the year should temper their expectations. Swap rates have soared since the trouble reignited, which has already led to a round of repricing among lenders.
"A few weeks ago, we thought we finally had some certainty but now it feels as though we are back to square one. It's at times like this that brokers earn their keep. And this is why it is vital that they are reaching out to anyone with six months or less on their current deal to help them navigate the uncertainty."
James Bentley, director of Financial Markets Online, added: “The UK economy has just delivered a gift-wrapped goodie basket to Number 10 Downing Street. The timing couldn’t be better for a new Prime Minister who pledged yesterday to lead a ‘cost of living’ government.
“A couple of months ago it had seemed that Britain was sliding into an inflationary doom loop. No longer. While still higher than both France and Germany, UK inflation is returning to more normal levels faster than expected and easing back from its conflict-induced spike.
“Much of the reset is thanks to June’s sharp fall in fuel prices. Last month average diesel costs fell by 10.7p per litre, and petrol by 2.1p per litre. Such rapid falls ease transport costs and soothe voters’ frayed nerves. However in recent days fuel prices have begun to surge back up following the resumption of fighting in the Gulf, so despite the progress we are far from out the woods yet.
“Stripping out the volatile components of the economy like fuel, the core CPI figure offers a clearer picture of where we are - and it hasn’t budged at 2.6%.
“All this means the Bank of England now has no reason to increase interest rates any time soon. It’s instead likely to watch and wait, and if inflation stabilises further it may hold off on making any rate rises at all this year.
“Cue huge relief for the 1.8 million homeowners who are due to remortgage this year, as well as the thousands of first-time homebuyers who held off during the months of uncertainty.
“This week's renewed fighting in the Gulf has led interest rate expectations to creep back up, but the confirmation that the jobs market is stable and inflation is settling are both wins for consumers and Britain’s fragile economy.”
