UK inflation eased in May, but the Bank of England remains focused on risks from rising energy costs

UK inflation rose by 3.4% year-on-year in May, slightly down from April’s 3.5% but above forecasts for a 3.3% increase.

Core CPI, which excludes volatile food and energy prices, eased to 3.5% from 3.8% in April, matching expectations. The Bank of England’s closely watched services inflation measure also slowed, falling to 4.7% in May from 5.4% the previous month—slightly below the 4.8% forecast.

Food prices climbed 4.4% in the year to May, the steepest rise in over a year, while goods prices rose 2%, marking the biggest annual increase since November 2023—posing a growing burden for lower-income households.

The May cooling in inflation aligns with the Bank of England’s forecasts, but rising energy prices—driven by escalating conflict in the Middle East—present new risks. Policymakers will need to monitor these developments closely and adjust their stance if inflation pressures re-emerge.

The Bank’s Monetary Policy Committee is set to announce its latest decision on Thursday, with markets broadly expecting interest rates to remain unchanged at the June meeting.

UK policymakers are once again navigating opposing forces: while inflation appears to be easing, this may prove temporary if geopolitical tensions drive energy costs higher and lift inflation expectations. However, these risks may be partly balanced by signs of a weakening labor market, which could dampen inflationary pressures.

Markets currently anticipate two 25-basis-point rate cuts by the end of 2025, following the Bank’s most recent reduction of the benchmark rate to 4.25% on May 8.