Inflation remained at 2.8% in May, surprising experts who had predicted a rise to around 3%. While the cost of living squeeze persists, the peace deal between the US and Iran offers hope for easing household bills. However, the fallout from the Middle East war continues to impact energy and food prices.
What Inflation Means for Your Money
Inflation measures how prices of goods and services rise over time. The Bank of England targets 2%, but inflation has stayed above that for years. Pantheon Macroeconomics forecasts inflation peaking at 3.5% in November before falling to 2.1% by July 2027. KPMG expects it to stay below 4%.
Energy Bills
Ofgem's energy price cap will jump 13% to an average £1,862 from July 1 due to higher wholesale costs from the war. However, if the ceasefire holds, the cap could fall in October and January, easing winter bills.
Food Prices
Food inflation fell to 2.2% in May, lower than feared. The IGD now forecasts a peak of 5.5% in the second half of 2026. Households with children may need an extra £203 for food this year and £207 next year.
Fuel Costs
Petrol prices soared 20% after the war but have begun to fall. The RAC expects petrol to drop to 148p per litre from 156p, and diesel to fall below 160p from 177p.
Wages and Interest Rates
Wage growth slowed to around 2.9%, potentially leading to real-terms pay cuts if inflation rises. The Bank of England is expected to keep interest rates at 3.75% on Thursday, with no cuts likely until 2027.
While inflation steadying offers some relief, households face continued pressure on essential costs. Experts advise maintaining pension contributions where possible to avoid missing out on long-term benefits.
