UK annual inflation unexpectedly remained steady at 2.8% in May, defying economist forecasts of a rise to 3%. This figure was driven by slower food price rises—the slowest since December 2024, with declines in the costs of meat, cheese, and vegetables—which offset higher transport and fuel costs.
The impact of the conflict in Iran on the UK cost of living has been more muted than initially forecast. While there were dire warnings of rocketing inflation when oil supplies were choked off through the strait of Hormuz in March, a US-Iran peace deal to end the war has since triggered dramatic falls in global energy markets. These developments suggest that fuel price rises failed to spill more widely across the economy and that inflation is on track to peak at levels below the Bank of England's most optimistic scenarios.
With the Bank of England due to update its monetary policy on Thursday, these figures reinforce the view that the Bank Rate will be kept on hold. Rob Wood, chief economist at Pantheon Macroeconomics, stated that the data makes a July hike less likely, with expectations now pointing toward the rate remaining on hold through the end of 2027.
Despite the current stability, inflation may accelerate in the coming months as energy utilities' contributions rise and supply chain pressures affect goods. Underlying services inflation remains above target rates and is slowing only gradually, which could sharpen concerns that the Iran conflict has embedded price pressures. However, a deteriorating labor market is expected to help curb any second-round effects.