UK inflation unexpectedly holds steady at 2.8% in May, easing pressure on Bank of England ahead of rate decision
Consumer price growth remained at 2.8% in May, wrong-footing economists who had forecast a rise to 3%, as falling food costs countered higher transport and fuel prices. The surprise reading bolsters expectations that the Bank of England will leave interest rates unchanged at its Thursday meeting.
Inflation defies expectations
The annual rate of consumer price inflation held at 2.8% in May, the same as in April, according to data released by the Office for National Statistics on Wednesday. Economists had expected an acceleration to about 3%, but a sharp slowdown in food price rises helped offset upward pressure from transport and energy. The flat reading means inflation remains at its lowest level since March 2025, despite the ongoing fallout from the Middle East conflict.
After last month's slowdown, inflation held steady in May as various price movements offset each other. The main upward movement came from transport with airfares, vehicle taxes and petrol prices all pushing up inflation. These were offset by lower food prices, with decreases in inflation seen across a range of meat, dairy and vegetable items compared to last month, as well as the cost of domestic heating oil, which fell back after climbing in recent months.
What moved prices
Transport costs were the main driver of upward pressure. Airfares jumped 10.3% month-on-month, partly linked to the early timing of Easter and school holidays. Motor fuel prices climbed as the average price of petrol rose by 0.6 pence per litre to 157.4p, the highest since November 2022, when fuel was surging after Russia's invasion of Ukraine. Vehicle taxes also pushed transport inflation to 6.8%, the highest level since November 2022. On the other side, food and non-alcoholic drink inflation eased to 2.2% from 3% in April, its lowest since December 2024, with notable declines in meat, particularly beef and ham, and dairy products like cheese. Household energy bills remained subdued after the lower Ofgem price cap took effect in April, while domestic heating oil costs fell back.
Bank of England implications
The unchanged inflation figure reinforces the view that the Bank of England will keep interest rates on hold at its meeting on Thursday, with analysts saying the prospect of a near-term hike has sharply diminished.
Unexpectedly steady inflation in May eliminates any lingering chance of a rate hike this Thursday and will go a long way to taking a hike in July off the table as well.
Pugh expects inflation to stay around current levels before a utility price cap reset pushes it higher in July, but stressed that the sharp drop in oil prices, a weak labour market and slowing pay growth make second-round effects much less likely than during the previous energy crisis.
Iran deal cools oil markets
The Iran war had been a key worry for inflation forecasts, but the US-Iran peace agreement reached at the start of the week is already easing energy costs. Brent crude fell 0.7% to $78.4 a barrel, while West Texas Intermediate dropped 0.8% to $75.41, after both benchmarks shed about 5% on Tuesday to three-month lows. The prospect of the Strait of Hormuz reopening, which had driven oil higher since late February, has reduced the risk of CPI breaching 4% this year. Meanwhile, the US Federal Reserve is also expected to hold rates steady tonight.
Market reaction
Sterling slipped after the data, while Asian equities mostly advanced. Japan's Nikkei index hit a record high, trading briefly above 70,000 before settling at 69,943, a 0.76% gain, as falling oil prices and signs of plateauing global rates buoyed sentiment.
