Inflation remained at 2.8% in May, defying predictions of a rise, but the fallout from the Middle East war could still worsen the cost of living squeeze. Here's what it means for your money in the months ahead, from energy bills to wages.
What is inflation and where might it be heading?
Inflation measures how prices of goods and services rise over time. The Bank of England targets 2%, but inflation has been above that for years. After falling from 3.3% to 2.8% in April, it held steady in May. However, experts warn this may be the calm before the storm. A 13% jump in Ofgem's energy price cap from July 1 is expected to push inflation higher, and the closure of the Strait of Hormuz due to the Iran war will keep goods prices elevated. Pantheon Macroeconomics forecasts inflation peaking at 3.5% in November, then falling to 2.1% by July 2027. KPMG predicts it won't go above 4%. Factors like a temporary VAT cut on attractions and a fuel duty cut could help keep a lid on inflation.
What will happen to energy bills?
Ofgem's energy price cap will rise 13% to an average £1,862 a year from July 1, driven by higher wholesale energy costs due to the Middle East war. However, if the ceasefire holds, wholesale costs could fall, potentially lowering the cap in October and January. The timing is crucial, as higher bills in winter would hit households harder.
What about food bills?
Food price inflation fell to 2.2% in May, with meat, dairy, vegetables, and fish dropping in price. The Institute of Grocery Distribution (IGD) now forecasts food inflation will peak at 5.5% in the second half of 2026, lower than earlier fears of 8%. However, higher wholesale energy and fertilizer costs will take months to feed through. Households with children may need an extra £203 for food this year and another £207 next year.
And fuel prices?
Petrol prices soared 20% to 159.53p a litre at one point, but have begun to fall. The RAC says if the ceasefire holds, petrol could drop to 148p a litre from the current 156p, and diesel from 177p to under 160p.
Wages
Wage growth has slowed, with private sector regular pay growth expected to drop to 2.9%. If inflation rises, average workers could face a real terms pay cut.
Interest rates
The Bank of England is expected to keep its base rate at 3.75% on Thursday. Economists say the steady inflation eliminates any chance of a rate hike soon, but cuts are unlikely until 2027. While this is a blow for borrowers, some lenders have been lowering fixed-rate mortgage costs.
