London's Economy Today editorial - June 2026
UK inflation holds steady in May
The latest Consumer Price Inflation (CPI) from the Office for National Statistics (ONS) showed that CPI inflation held steady at 2.8% in the 12 months to May 2026, unchanged from April after falling from 3.3% in March (Figure 1). CPIH inflation, a broader measure that includes owner occupiers’ housing costs, also remained unchanged at 3.0% year-on-year.
Figure 1: CPI, goods, services and core annual inflation rates, UK, May 2021 to May 2026
Source: ONS, GLA Economics
The ONS reports that transport made the largest upward contribution to the monthly change in both CPIH and CPI annual rates, while food and non-alcoholic beverages made the largest partially offsetting downward contribution. Transport inflation rose to 6.8% in the 12 months to May, its highest rate since December 2022, reflecting continued pressure from motor fuel prices. By contrast, food and non-alcoholic beverages inflation fell from 3.0% in April to 2.2% in May, its lowest rate since January 2025.
Core CPI rose slightly from 2.5% to 2.6%. Services inflation picked up from 3.2% to 3.7% and remained above goods inflation, which slowed from 2.4% to 2.0%, highlighting persistent domestic price pressures despite weaker goods inflation.
Although CPI inflation remains above the Bank of England’s 2% target, it is now within the Bank’s ±1% percentage point tolerance band. However, with services inflation rising and global energy markets remaining volatile, the latest data are unlikely to be seen as clear evidence that inflationary pressures are continuing to ease.
At its June meeting, the Bank of England’s Monetary Policy Committee voted 7–2 to maintain Bank Rate at 3.75%, with two members voting to raise rates by 0.25 percentage points to 4.0%. The Committee noted that global energy prices had fallen since the previous meeting but remained higher than before the Middle East conflict and continued to be volatile. With the impact of the energy shock on the UK economy still uncertain, the Bank is likely to remain cautious in the coming months, particularly if higher energy prices begin to feed through into broader wage- and price-setting behaviour.
US and Iran moving towards a peace deal
In some more positive news for future inflation after nearly four months of conflict that disrupted global commodity markets, the US and Iran stated they had reached an agreement to end their war and reopen the Strait of Hormuz during the middle of this month. However, the formal signing ceremony which was scheduled for 19 June in Switzerland was postponed due to stated logistical reasons, although there are signs that an agreement is being progressed towards. The details of the deal are still being finalised but it is believed it will extend the existing ceasefire and commit both sides to negotiating a permanent settlement, over a 60-day period.
Prior to its closure the Strait carried around 20% of the world's oil and liquefied natural gas, and its closure since the end of February drove sharp price rises. Following the mid-June announcement, oil prices fell back although they still remain elevated compared to their pre-war levels. And analysts warn that a full return to pre-war supply could take time given the scale of disruption.
Therefore, risks remain for energy prices and inflation in the UK. Sustained high oil and gas prices since February have weighed on UK inflation. Should the de-escalation hold, this points to some relief for household energy bills and business input costs. However, considerable uncertainty remains, and previous ceasefires have proven fragile.
UK economy continues with mild, steady growth
The latest data from the ONS show that UK real GDP grew by 0.7% in the three months to April 2026 – a slight improvement compared to the 0.6% and 0.5% recorded in the three months to March and February respectively (see Figure 2). On a monthly basis, however, output fell by 0.1% in April, after monthly growth of 0.3% in March and 0.4% in February.
Figure 2: UK real three-month GDP growth, April 2025 to April 2026
Source: ONS
Over the three months to April, the services sector (an important sector for London) made the largest contribution to growth, expanding by 0.8%. Within services, information and communication (up 1.7%), professional, scientific and technical activities (up 1.3%) and wholesale and retail (up 1.2%) were the strongest contributors - while arts, entertainment and recreation fell by 0.5%. The Production sector contracted by 0.1% over the three months to April, though manufacturing grew by 0.6%, and construction rose by 1.6%.
However, the decline in the monthly measure was led by the services sector which fell by 0.2%. The ONS linked much of the weakness to the conflict in the Middle East, noting that “the cancellation of multiple sporting events in the Middle East had affected the output of UK-based businesses; sports, amusement and recreation activities fell by 9.1%”. Production was flat over the month, though manufacturing grew by 0.4%.
Looking beyond the monthly volatility, the broader picture remained one of mild expansion. GDP was 1.1% higher than in the same three months a year earlier, and real GDP per capita (which strips out population growth) rose by 0.6% in the first quarter of 2026 (0.9% above its level a year before). While the three-month trend still points to continued (if subdued) growth, the continued drag from the Middle East conflict and higher energy costs suggests momentum may be harder to sustain in the coming months.
OECD nudges up its UK growth forecast, while the World Bank flags a weaker global backdrop
In its June 2026 Economic Outlook, the OECD raised its forecast for UK GDP growth to 0.9% in 2026 and 1.1% in 2027 – an upward revision from the 0.7% it had penciled in for 2026 in its March interim outlook. It also trimmed its UK inflation forecast to 3.7% in 2026 (from the roughly 4% it projected in March), easing to 2.4% in 2027, though that still leaves prices running above the Bank of England’s 2% target. The OECD expects unemployment to drift up to 5.5% in 2026 and 5.3% in 2027 as the labour market loosens. It judged that growth would stay restrained in the near term, as higher energy prices following the Middle East conflict squeeze real household incomes, and again highlighted the UK’s “thin fiscal buffers” as a constraint on the government’s room to respond.
The World Bank, in its June Global Economic Prospects, struck a more cautious note on the world economy as a whole, cutting its global growth forecast to 2.5% in 2026 (the weakest pace since the pandemic) before an uptick to 2.8% in 2027. It does not publish a separate UK forecast but flagged the possibility of interest-rate rises in the Eurozone and the UK in the near term, as earlier expectations of monetary-policy easing have faded.
These forecast updates sit alongside the IMF’s May Article IV statement, reported in last month’s LET, which raised its 2026 UK forecast to 1.0%. Taken together, the major international institutions now cluster around UK growth of roughly 0.9 to 1.0% in 2026.
London’s labour market shows signs of improvement
The latest labour market data from the ONS suggests that labour market conditions in London have continued to improve in recent months, although some indicators remain weaker than a year ago. London’s unemployment rate was estimated at 6.6%, a decrease on the quarter but an increase of 0.2 percentage points (pp) from a year earlier. The UK average was 4.9%. The more timely estimate of payrolled employees (which is subject to revision) showed a decrease of 1,560 (less than 0.1 pp) in the number of payrolled employees in London between April and May 2026, and a decrease of 1.0% on the year. And London’s inactivity rate (the measure of those not looking and/or not available to work) was estimated at 20.3%. This was a decrease of 0.3pp on the previous year but an increase on the quarter. It is lower than the UK-wide estimate of 21.0%.
London remained a net fiscal contributor to UK public finances in 2024-25
The ONS published data last month looking at the fiscal contributions of the various UK nations and English regions to the public finances. This data showed that London and the South East were the only areas that provided a net fiscal contribution to the UK’s finances. In particular it showed that London contributed £48.8bn more in tax receipts than it received in expenditure in the tax year 2024-25, up from £45.2bn in 2024-25. London has contributed more in terms of tax revenue than it receives in expenditure for every tax year for which data is available except for 2009-10 following the Global Financial Crisis and 2020-2021 during the Covid pandemic. For comparison the South East region (the only other region to run a surplus) had a positive fiscal contribution of £15.7bn in 2024-25 and the UK had a fiscal deficit of £151.8bn.
Elsewhere the Government has raised concerns with Ofwat about a proposed £10bn rescue package for Thames Water. The environment secretary, Emma Reynolds, has said that the plans could place “undue burden” on consumers adding “I am not convinced the current proposal is good enough for consumers or the environment”. This comes as lenders to the firm are in discussions with Ofwat to take formal ownership of the firm. Ofwat said that it will be evaluating the plan “carefully to assess whether they deliver a turnaround plan in the company’s operational performance and strengthen its financial resilience to the benefit of customers and the environment”.
GLA Economics will continue to monitor these (and other) aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.