- CPI held steady at 2.8% in May – lower than had been expected
- Food inflation fell 0.1% in the month and was down to 2.2% over 12 months
- Upward pressure came from airfares and the rising price at the pump
- Market expectation is now almost 30% that there will be no interest rate hike this year*
- Producer input prices jumped by 8.7% in May, the largest annual increase since February 2023
Danni Hewson, AJ Bell head of financial analysis, comments on the latest UK inflation data:
“It would be churlish not to at least quietly celebrate the fact that prices haven’t risen by as much as many economists had feared. May’s inflation figures could give some hope to UK households that the dreaded cost of living squeeze might not be as intense as feared.
“Food prices actually fell by 0.1% between April and May, and year-on-year food inflation was at the lowest level it’s been since December 2024. Airfares and petrol prices shot up as the price of a barrel of Brent crude bobbed around $100 for most of the month, but since the announcement of a US-Iran deal the price has plummeted and today it’s below $80 a barrel.
“Today’s numbers will be scrutinised by the Bank of England’s rate setters when they gather tomorrow, and market expectation is near 100% that there will be no rate rise at this meeting. There’s even increasing speculation that any hike might be off the table for the rest of the year.
“But it’s not all good news, especially when you consider that before the start of the Iran war inflation had been expected to be back to the Bank’s 2% target by now and many were expecting interest rates to be cut at least once this year.
“Disruption to global supply chains and the elevated oil price has already impacted input costs, which shot up by a whopping 8.7% in May. Whilst consumer caution and a weak economy is expected to limit the extent to which those costs can be passed on, some price increases are already baked in.
“The all-important core inflation data edged up in May too, as the service sector passed on additional costs. This will trouble rate setters, especially those already minded to vote for the kind of insurance hike delivered by the ECB last week.
“But a weak labour market and sluggish growth will play a significant part in limiting the secondary effects which played a huge part in keeping inflation higher for longer after Russia’s invasion of Ukraine. If a permanent truce is agreed, it’s likely those worst-case scenarios can be filed in the rubbish bin.”
*Source: LSEG
