UK inflation holds steady at 2.8% in May

According to official figures published on Wednesday, inflation in the UK was slightly below expectations at 2.8% in May.

Economists polled by Reuters had expected the annual inflation rate to rise to 3% in May.

Inflation fell to 2.8% in April but the decline, attributed to a change in the UK’s regulated energy price cap, was expected to be short-lived. The ceiling price is expected to increase by 13% this summer, when energy costs will reach the highest level in the last 2 years.

The UK’s May print fell below the euro zone’s May reading of 3.2% and well below the US May inflation rate of 4.2%.

Transport was the biggest contributor to the rise in prices in May, partly offset by falling food and non-alcoholic drink prices, Britain’s Office for National Statistics said on Wednesday.

The ONS said airfares, which rose 10.3% month-on-month, as well as motor fuel and sea charges, increased transport costs for Britons in May. Analysts said the timing of the Easter holidays this year could contribute to rising prices.

Meanwhile, the price of gasoline rose by an average of 0.6 pence (0.8 US cents) per liter between April and May. In the same period last year, average petrol prices fell by 2.1 pence. Average prices rose to their highest level since November 2022, when energy prices rose following Russia’s full-scale invasion of Ukraine.

At its last meeting, the Bank of England’s Monetary Policy Committee voted to keep the interest rate at 3.75%.

Policymakers had said that “monetary policy cannot affect energy prices,” citing the impact of the US-Iran war, which kept oil and gas prices high for months after the Strait of Hormuz was closed.

LSEG data shows markets are pricing in a 95% chance that the Bank of England will keep interest rates steady at its next meeting on Thursday; But traders expect the central bank to raise interest rates by the end of this year.

Scott Gardner, investment strategist at JP Morgan Personal Investing, said in a note on Wednesday morning that the latest data “will provide some hope that any recovery in UK inflation may be short-lived.”

Over the weekend, the United States and Iran announced a framework agreement that will end their nearly four-month-long war. Both US President Donald Trump and Iranian officials said the Strait of Hormuz would be reopened after the agreement was signed in Geneva this week.

“While energy dynamics may trend higher in future readings, many will be watching closely to see how the Ofgem price cap affects inflation figures and household spending in the coming months,” Gardner said.

“For Bank of England policymakers who will be making their next interest rate decision soon, this unchanged inflation reading could make the decision to keep interest rates steady in the short term simpler. Policymakers will likely remain in ‘wait and see’ mode as the unstable situation in the Middle East ends and price pressures remain.”

Correction: This story has been updated to reflect that May inflation reached 2.8%.