June’s inflation print has caught markets slightly off-balance.

Headline CPI rose unexpectedly to 3.6% in June, up from 3.4% in May, when most had forecast it to remain flat. It’s a small jump, but one that slightly clouds the outlook for the Bank of England’s expected rate cuts – particularly the much-anticipated August reduction.

Services inflation remains stubborn, with upward pressure from categories like hotels, airfares, food and clothing. While the increases were not dramatic, they hint at businesses continuing to pass on higher costs, likely linked to April’s National Insurance and minimum wage rises, into the second half of the year.

Does this derail the Bank’s path? Probably not, but it does reduce the certainty. Market odds on an August cut will likely retreat slightly – though tomorrow’s ONS labour market data could tip the balance again if it shows signs of further weakness.

The bigger risk, and one that’s yet to feature prominently in public debate, is the growing tension between a weakening labour market and persistent cost pressures. If wages soften while prices remain sticky, the cost-of-living pinch could worsen, and that could have broader implications for both borrower resilience and housing market confidence.

This matters because, unlike previous inflationary periods (like in 2024) where rising wages helped offset higher prices, a reversal of that trend means people are increasingly worse off in real terms. Disposable incomes shrink, discretionary spending falls, and essential costs – housing, energy, food – begin to take up more of the monthly budget.

Implications for Lenders and Borrowers

For borrowers, that creates pressure on affordability, particularly for those coming off fixed-rate deals or looking to refinance. Even small rises in monthly outgoings can make mortgage serviceability more precarious, especially in areas where wages are stagnant or employment is becoming less secure.

For lenders, it raises questions about credit quality, demand outlook, and how quickly rate cuts need to flow through to products to preserve market confidence. While the Bank of England may still be on a downward path, it will have to weigh whether easing too fast in the face of sticky prices sends the wrong signal, or whether moving too slowly risks undermining consumer resilience, just as the labour market begins to soften.

In the wider housing market, this dynamic could take some of the heat out of recent momentum, tempering price growth and activity in the short term. But this looks more like a pause than a reversal – affordability is shaped by more than just rates, and with interest and swap rates trending lower, the conditions for recovery remain firmly in place.

For now, the Bank’s downward rate trajectory remains intact, but today’s data is a reminder that inflation’s tail can still wag the dog.