May Inflation Data Shows No Change Ahead of BoE Policy Meeting

UK consumer inflation remained unchanged at 2.8% year-on-year in May, below market expectations for an increase to 3.0%. Core inflation, which excludes volatile components such as food, energy, alcohol, and tobacco, rose to 2.6% from 2.5% in April, also coming in slightly below forecasts.

The annual inflation rate held at its lowest level in more than a year, first reached in April, modestly reducing market expectations for additional policy tightening later this year.

The softer-than-expected reading was driven by lower prices for domestic heating oil, meat, vegetables, and dairy products, which helped offset upward pressure from higher airfares and fuel costs.

Despite the recent moderation, inflation has remained above the Bank of England’s 2% target for most of the past five years. The central bank’s projections suggest inflation could rise above 3.5% by year-end and, under a more adverse scenario, potentially exceed 6% in early 2026.

A key concern for policymakers remains services inflation, a closely watched measure of underlying price pressures. Services prices accelerated to 3.7% in May from 3.2% in April, reflecting, in part, a sharp 10.3% monthly increase in airfares.

While the latest inflation data were somewhat more encouraging than expected, they are unlikely to alter the Bank of England’s cautious policy stance. Although the prospective peace agreement between the United States and Iran and the potential reopening of the Strait of Hormuz have improved the outlook for global energy markets, policymakers are expected to remain vigilant regarding domestic inflation risks.

The Monetary Policy Committee is widely expected to leave interest rates unchanged at 3.75% at Thursday’s meeting. The prevailing view is that the BoE can afford to wait and assess the economic impact of recent geopolitical developments before deciding whether further policy tightening is warranted.

However, some policymakers remain concerned that businesses may use the current environment to pass higher costs through to consumers more broadly, potentially reinforcing inflationary pressures and weighing on household confidence. The UK has been among the Western economies most exposed to the effects of the Middle East conflict due to its reliance on imported natural gas. This was reflected in an 8.7% annual increase in raw material costs in May, the strongest rise since February 2023.