UK markets advanced this week, with the FTSE 100 Index rising by 1.28% to trade at 10,690 points at the time of writing.
UK inflation eased more than expected in June, providing some welcome relief for households and policymakers, although the outlook remains uncertain as higher energy costs and geopolitical tensions threaten to reignite price pressures. Consumer price inflation slowed to 2.6% in June, down from 2.8% in May and below economists’ expectations of 2.7%.
According to the Office for National Statistics (ONS), the decline was driven primarily by lower petrol prices alongside easing food and clothing costs. Services inflation, a key measure of domestic price pressures closely monitored by the Bank of England, edged down to 3.6% from 3.7%, while core inflation, which excludes food and energy, remained unchanged at 2.6%.
The latest figures arrive as Prime Minister Andy Burnham’s new government begins implementing measures aimed at easing the cost-of-living burden, including proposals to remove VAT on household electricity bills, introduce a cap on bus fares and lower business rates for pubs, clubs and live music venues by 20% from April.
However, the improvement in inflation may prove temporary. Rising tensions in the Middle East have pushed oil prices back above $90 per barrel, increasing the risk of higher fuel and energy costs in the months ahead.
At the same time, Ofgem’s energy price cap is scheduled to increase by 13% from July, adding further pressure to household budgets. Financial markets have responded by bringing forward expectations for Bank of England interest rate increases, with investors now pricing in one or two quarter-point rises before year-end.
Nevertheless, softer wage growth and a cooling labour market may support the Bank’s preference to leave rates unchanged at 3.75% at its next meeting. The labour market continues to show signs of slowing. Payroll employment increased by just 3,000 between April and May, while preliminary data indicated a further decline of 4,000 jobs in June.
Employment levels are now 0.3% lower than a year ago. Private sector wage growth also moderated, with average weekly earnings excluding bonuses rising 2.9% year-on-year in the three months to May, the slowest pace in five years.
Meanwhile, the unemployment rate remained relatively stable at 4.9%, marginally better than expectations, although vacancies fell by 7,000 over the latest three-month period as smaller businesses continued to cite higher operating and labour costs.
Public finances also remain under pressure. Government borrowing reached £57.6 billion in the fiscal year to June, exceeding the Office for Budget Responsibility’s forecast by £2.7 billion despite June’s monthly borrowing coming in below official expectations.
Elsewhere, UK retail sales strengthened in June, and confidence improved sharply in July as sunshine, football and the promise of political change helped people feel more upbeat about the economy. The ONS said the volume of goods bought from retailers rose by 1% from the previous month, a much stronger figure than the drop of 0.3% analysts had expected.
Commodity markets
In the commodity markets, Brent crude futures traded around $98 per barrel on Friday and are set for a weekly rise after attacks by Iranian-backed Houthi militants in the Red Sea threatened to squeeze global supplies further and reignite a global inflation shock.
The Houthis said they had attacked two Saudi Arabian tankers in the Red Sea following their move to impose a maritime blockade on the kingdom this week. The targeting of the Saudi ships raises the spectre of the Houthis closing the Bab al-Mandab Strait, which connects the Red Sea with the Gulf of Aden and the Indian Ocean.
It has become a vital route for Saudi Arabia’s oil exports since Iran seized control of the Strait of Hormuz in the early days of the war. The attacks also risk unravelling a four-year ceasefire between the Houthis and Saudi Arabia. Rising US petrol prices, which topped $4 a gallon earlier this week, are likely to fuel voter frustration with US President Donald Trump ahead of November’s midterm elections.
The intervention from the Houthis comes following the breakdown of the ceasefire, with the US and Iranian forces trading fire for almost two weeks. Trump warned the Houthis and Iran that they would face “major military punishment” if the attacks continued. The Houthis are one of the most potent members of Iran’s so-called axis of resistance.
However, they have largely stayed out of the conflict, apart from firing several barrages of missiles and drones at Israel in March and early April.
Gold prices traded around $4,050 an ounce on Friday, pulling back from two-week highs hit earlier in the week as rising oil prices fuelled inflation concerns, strengthening the case for higher interest rates ahead of a Federal Reserve policy meeting next week.
Equity markets
US equity markets rose on Friday after a volatile week, driven by soaring oil prices and renewed doubts over artificial intelligence spending. In Thursday’s regular trading session, the Dow Jones Industrial Average fell 0.97%, the S&P 500 lost 1.21%, whilst the Nasdaq Composite declined 2.15%.
President Trump has unleashed fresh tariffs on dozens of countries, even as his advisers warn him against risking the economic shocks of his original trade war ahead of the midterm elections. Trump unveiled tariffs of 50% on Canadian goods on Monday, having already hit Brazilian imports with a 25% levy, underscoring his continued fixation with using tariffs against trading partners.
The fresh tariffs come after the Supreme Court earlier this year struck down the reciprocal levies that were put in place following Trump’s “liberation day” announcement in April 2025. Washington moved to a 10% regime in the wake of the Supreme Court decision this February, but those measures are due to expire this Friday.
The new set of tariffs have been put in place following a probe of forced labour practices, allowing Trump to avoid using the emergency authorities knocked down by the Supreme Court. The tariffs will fall between 10% and 12.5% on 60 countries and were first proposed by US trade officials in June.
The new approach to imposing tariffs underscores the way in which the administration must rely on a patchwork of more procedural laws to apply high duties, rather than being able to hit countries with huge tariffs almost instantly under emergency presidential powers. The duties will include exemptions of oil, gas and fertiliser, along with some other goods that the US does not produce, and offer carve-outs for goods that are already hit by separate national security tariffs.
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