UK inflation remained at 2.8% in May, defying expectations of a rise to 3% and suggesting that the impact of the Iran conflict on the cost of living may be less severe than initially feared. The Office for National Statistics reported that while motor fuel prices surged 25% year-on-year, slower food price growth offset transport costs, keeping overall inflation unchanged.
The benign reading follows a larger-than-expected fall in April, raising hopes that fuel price rises have not spilled over more broadly into the economy. Economists had warned of sharp inflation spikes after Iran disrupted oil supplies through the Strait of Hormuz in March, but recent data indicate a more muted effect.
Food prices fell 0.1% month-on-month in May, a welcome sign for consumers. However, the impact of higher fertiliser costs, linked to Gulf supply routes, may still emerge over coming months. Bank of England Governor Andrew Bailey noted that firms appear to lack pricing power, as cash-strapped shoppers resist higher prices.
The Bank of England is widely expected to hold interest rates at 3.75% at its Thursday meeting. Markets now anticipate a possible rate rise in November rather than September, with some analysts suggesting the next move could eventually be a cut if inflation continues to ease.
