UK inflation holds steady at a 13-month low as the Bank of England prepares for its upcoming rate decision
In May, UK inflation remained steady at 2.8%, surprising economists and shaping expectations ahead of the Bank of England’s rate decision.
The reading aligned with April’s 13-month low, contradicting economists’ forecasts in a Reuters poll that anticipated an increase to 3.0%. The unexpected stability momentarily impacted sterling, causing it to dip slightly against the US dollar, as financial markets recalibrated their expectations for upcoming rate hikes.
Analysts had expected upward pressure on prices, partly due to global energy tensions; however, lower costs in various food categories helped balance out increases in other areas. Prices for meat, vegetables, dairy products, and heating oil decreased in comparison to April, aiding in offsetting the increased transport expenses like airfares and petrol.
The Office for National Statistics observed that inflation has consistently stayed above the Bank of England’s 2% target for the majority of the past five years, although recent months have indicated some signs of moderation.
Previous forecasts from the central bank indicated that inflation might rise above 3.5% later this year and, in more extreme scenarios, could possibly surpass 6% in the subsequent year.
Markets have recently been affected by the reduction of geopolitical tensions due to a preliminary understanding between the US and Iran, which aims to reopen crucial oil shipping routes through the Strait of Hormuz. We anticipate this development will stabilize energy supply chains.
Economists indicate that the most recent data advocates for a careful approach from policymakers.
“Inflationary pressure remains uneven, which warrants a cautious approach from the Bank of England,” stated Yael Selfin, chief economist at KPMG.
Most analysts anticipate that the Monetary Policy Committee will vote 7–2 in favor of maintaining rates at 3.75% during Thursday’s meeting, as officials strive to balance the deceleration in price growth with ongoing underlying pressures.
Bank of England Governor Andrew Bailey has suggested that policymakers have the opportunity to evaluate the wider economic effects of global tensions. Nonetheless, certain committee members continue to express concerns that businesses might transfer increasing costs to consumers or that public trust in the inflation target could diminish.
Britain has encountered a greater than usual impact from recent global energy disruptions because of its dependence on imported natural gas. Manufacturers indicated that raw material costs increased by 8.7% year -over- year in May, marking the most rapid rise since early 2023.
Services inflation increased to 3.7% from 3.2% in April, aligning with forecasts and closely monitored by the central bank as a key indicator of underlying pressure. A notable 10.3% rise in airfares, often subject to fluctuations and affected by seasonal travel demand, partly drove the increase.
Core inflation, excluding food, energy, alcohol, and tobacco prices, increased modestly to 2.6% from 2.5%, falling slightly short of expectations.
