It was lower than economists expected
A view of the Bank of England(Image: PA Archive/PA Images)
Inflation has remained below three per cent, though economists are forecasting further price rises later in the year.
The Office for National Statistics revealed that inflation in the 12 months to May came in lower than analysts had anticipated, with the consumer prices index (CPI) recording a figure of 2.8 per cent.
Core inflation, which excludes volatile energy and food prices, stood at 2.6 per cent, while services inflation — closely watched by Bank of England rate-setters for signs of wage pressures — rose sharply from 3.2 per cent to 3.7 per cent.
“The main upward movement came from transport with airfares, vehicle taxes and petrol prices all pushing up inflation,” Grant Fitzner, chief economist at the ONS, said.
“These were offset by lower food prices, with decreases in inflation seen across a range of meat, dairy and vegetable items compared to last month as well as the cost of domestic heating oil, which fell back after climbing in recent months.”
Analysts have suggested inflation could approach four per cent later this year and into early 2027, with the Bank warning that prices could surge as high as six per cent in the most severe scenario, as reported by City AM.
Much of what happens next hinges on whether the Strait of Hormuz fully reopens following the peace agreement between the US and Iran, as well as how businesses respond to the shifting economic landscape.
Paul Dales, chief UK economist at Capital Economics, forecast that inflation would climb over the coming nine months, though a recent dip in oil prices suggests it may fall short of four per cent.
He noted that recent data indicated higher energy costs “don’t yet seem to be feeding into other items”, as evidenced by easing food price inflation.
Andrew Griffith, the shadow business secretary, cautioned that rising business costs of as much as nine per cent “means either higher prices are coming to the high street, more firms closing with the loss of jobs, or both”.
Should tensions flare up once more across the Middle East, analysts caution that upward pressure on prices could intensify.
The Bank’s Monetary Policy Committee faces a considerable challenge given a weakening labour market and stubbornly elevated inflation expectations.
Luke Bartholomew, deputy chief economist at Aberdeen, said: “With inflation coming in softer than expected again, the pressure on the Bank of England to hike rates this year will continue to fade, although there may still be a couple of policymakers who vote for a rate increase tomorrow.
“Despite energy prices having fallen recently, there is more inflationary pressure to come for the UK.”
The Bank is expected to lean on its scenario modelling, with two outcomes from the Iran conflict suggesting that interest rates would not need to rise. In the worst-case scenario, however, interest rates could surge back to their previous peak of 5.25 per cent.
This would largely be driven by “second round effects”, where high wage pressures spill into higher prices for consumers, and vice-versa.
Economists on City AM’s Shadow MPC called on the Bank to hold interest rates steady, warning that overly aggressive tightening could risk strangling economic growth, while evidence of mounting wage growth pressures remained inconclusive.
Two out of nine economists on the Shadow MPC argued that interest rates should be raised, citing the price risks facing the UK economy in the months ahead.
Economists also cautioned that the Bank faces a significant challenge in maintaining public credibility over its capacity to keep prices stable should inflation climb higher than anticipated.
Rachel Reeves said: “While the war in the Middle East pushes prices up globally, we have got the right economic plan and inflation has held steady.”
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