UK inflation unexpectedly held steady at 2.8% in the year to May, defying expert predictions of a rise to 3%, as a significant slowdown in food price increases counterbalanced the upward pressure from higher transport costs. New figures released by the Office for National Statistics (ONS) reveal that the pace of food price rises eased to a 17-month low, providing a measure of stability in the consumer price index.
Inflationary Pressures and Offsets
The ONS reported that transport costs experienced the fastest rate of increase over the year to May, with overall transport inflation reaching 6.8%, its highest annual rate since December 2022. A primary driver of this was motor fuels, which were 24.6% higher in May compared to the same period last year. Grant Fitzner, the ONS’s chief economist, highlighted that airfares, vehicle taxes, and petrol prices collectively contributed to pushing up inflation.
“Airfares, vehicle taxes and petrol prices all pushed up inflation,” Fitzner stated. However, this upward movement was “offset by lower food prices, with decreases in inflation seen across a range of meat, dairy and vegetable items compared to last month.” Domestic heating oil prices also saw a decline after a sharp increase, influenced by the recent conflict in the Middle East.
Food Prices Provide Relief
Food inflation saw a notable deceleration, falling from 3% in the year to April to 2.2% in the year to May. This marks the slowest rate of food inflation since December 2024, a significant easing that contributed substantially to the overall steadiness of the inflation rate. The British Retail Consortium (BRC) commented on these figures, suggesting that the easing food inflation underscores the highly competitive nature of the British supermarket sector. However, the BRC cautioned that food inflation is likely to rise again in the coming months, indicating that the current respite may be temporary.
Economic Outlook and Geopolitical Factors
While the immediate inflation figures offer some relief, the broader economic outlook remains complex, heavily influenced by geopolitical developments. The ongoing impact of the war in the Middle East has been a significant factor in global price movements. Analysts had widely anticipated inflation to steadily increase over the coming months due to this conflict. However, a recently agreed peace deal between the US and Iran could potentially lead to smaller future increases, according to some analysts.
Charlotte O’Leary, an associate economist at the National Institute of Economic and Social Research (NIESR), warned of a “sizeable” upward impact on inflation when Ofgem sets its energy price cap in July. She explained that “the lagged effects of higher oil prices are still feeding through.” O’Leary also added a note of caution, stating that “should the [US-Iran] deal collapse, oil may rebound and reinstate upward pressure on inflation.”
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, acknowledged the good news of slower food inflation, noting it has been “somewhat surpassed” by the prospect of further price moderation due to the US-Iran peace deal. Nevertheless, Thiru cautioned that “even with hostilities seemingly over, the UK faces a painful hangover from the Iran conflict, with energy and other supply chains likely to take months to normalise, delaying any meaningful easing in inflation until late 2026.” Many economists had previously predicted inflation would peak at between 3.5% and 4% in the second half of 2026, significantly above the Bank of England’s 2% target.
Political Reactions and Monetary Policy
The inflation data elicited contrasting responses from political leaders. Chancellor Rachel Reeves stated that the government was “protecting families and businesses from rising costs, with cuts in energy bills and freezes in fuel duty and rail fares.” She added, “While the war in the Middle East pushes prices up globally, we have got the right economic plan and inflation has held steady.”
Conversely, Shadow Chancellor Mel Stride asserted that “prices are still rising too fast.” He criticised the government’s approach, claiming, “Thanks to Labour’s choices the UK went into the latest energy crisis with the highest inflation in the G7.”
These inflation figures arrive just ahead of the Bank of England’s crucial interest rate decision on Thursday. Economists widely anticipate the Bank’s Monetary Policy Committee to maintain the core interest rate at its current level of 3.75%. Yael Selfin, chief economist at KPMG UK, remarked that the new figures “strengthen the case” for a hold on interest rates. She elaborated, “Underlying inflationary pressures have yet to show clear signs of strengthening, which is likely to underpin a majority decision within the Monetary Policy Committee to hold interest rates at Thursday’s meeting.”
The unexpected stability in May’s inflation rate, primarily driven by a deceleration in food price increases, offers a temporary reprieve. However, the underlying pressures from global energy markets, the potential for geopolitical shifts, and the anticipated impact of future energy price caps suggest that the path to the Bank of England’s 2% inflation target remains fraught with challenges and uncertainties, with a meaningful easing potentially delayed until late 2026.
