UK inflation has held at 2.8% in the latest figures from the Office for National Statistics, defying expectations of a rise. The data gives the Bank of England some breathing space ahead of tomorrow’s interest rate decision, although inflation remains above its 2% target.
With price pressures still lingering, policymakers are expected to wait for clearer signs of a sustained slowdown before changing course.
Industry professionals are reacting to the latest figures below:
Lindsay James, investment strategist at Quilter:
“After inflation surprisingly dropped below 3% last month, it has managed to keep pace at the same rate, 2.8%, surprising the market which expected it to bounce back. While the war in the Middle East is over, for now, and normality can supposedly resume, inflation has managed to hold steady, though the likelihood is that it won’t suddenly start falling for a number of months. As a result, today’s figure is a pleasant surprise.
“Going forward, the picture looks more complicated. The energy price cap will rise 13% from July as a result of elevated oil and gas prices, so the benefits of the US-Iran resolution will not be immediately felt. Indeed, food prices are likely to see greater impact from higher costs of production as the cost and availability of fertiliser, energy and transportation remains restricted until the Strait of Hormuz is fully opened again. Meanwhile, there are increasing concerns we are likely to see the most powerful El Nino weather system on record in the months ahead, which has the potential to ruin crops and harvests.
“Despite the good news on inflation, the Bank of England is expected to retain interest rates at 3.75% when it meets on Thursday. With growth already experiencing headwinds from higher oil prices, the problem of inflation in this situation will be resolved not by a rate rise but by an easing of supply chains. With the Middle East situation looking somewhat calmer, that can hopefully take rate rises off the table. But to avoid such a situation happening again, the government needs to act swiftly to decouple the UK from the harshest impacts of such events.”
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, when the Ofgem price cap moves higher next month. So, the Bank will still want to remain vigilant to the impact of higher household energy bills on broader inflation expectations. But with the economy otherwise relatively weak, it is plausible speculation begins to turn once again to when the Bank will cut rates again, not hike.”
Kevin Brown, savings expert at financial mutual Scottish Friendly, says:
“The data suggests the recent energy shock hasn’t fed through as forcefully as feared, giving the Bank of England more room to look through immediate inflationary pressure from the Iran conflict.
“At tomorrow’s meeting, the Bank will likely still need to tread carefully. The economy contracted in April, hiring intentions remain weak and households are highly price sensitive, so raising rates could add pressure while lacking the power to lower global energy prices.
“Hopefully easing pressures in the Middle East should dampen inflation concerns and give policymakers more time to assess whether this is a short-term shock. That points to a hold, while an unchanged reading makes it harder to argue for an immediate rate rise.
“For households, this is encouraging, but inflation doesn’t need to be rising for the cost-of-living squeeze to remain painful. The practical response for many will be to review savings rates, energy tariffs, mortgage costs and everyday spending, while considering whether longer-term money could work harder through investing.”
Mike Ambery, Retirement Savings Director at Standard Life plc said:
“Today’s unchanged 2.8% inflation reading may offer some relief to many across the UK, with a rise to 3% broadly expected. That said, the figure still sits above the Bank of England’s 2% target, and many households will continue to feel the strain. The recent US-Iran truce could help ease pressure on oil prices later this year if it holds, but with the July energy price cap change on the horizon, household bills are likely to stay under pressure over the summer.
“This context makes tomorrow’s Bank of England decision especially important. Rates are widely expected to be held at 3.75%, but the outlook from here is less straightforward as policymakers balance signs of a softer labour market against the risk of persistent above-target inflation. While a sustained easing in global pressures could reduce the need for further tightening, the Bank will be watching the data closely.
“For households and those planning for retirement, the squeeze may not ease quickly. Just because the figure has not increased month on month, prices are still rising, and over time that can steadily reduce spending power, particularly for people approaching retirement. When essential costs rise, pension contributions can feel like an easy place to cut back, but doing so can mean missing out on tax relief, employer contributions and potential investment growth. Where affordable, keeping contributions going, or restarting them when possible, can help people stay on track.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, part of Raymond James Wealth Management, comments:
“A Middle East peace deal could see a welcome tamping of the inflation hump hitting UK households this year, meaning policymakers can breathe a tentative sigh of relief.
“Despite a peace deal being reached, disruption to global energy markets and related supply chains is yet to work its way through the system. Households still need to brace themselves for pricier shopping baskets and energy bills in the coming months.
“But the opening of the Strait of Hormuz is undoubtedly good news for consumers, business owners, and central banks alike. It means that the price jolt won’t be as ferocious as it might have been, and it could give way to a calmer inflationary setting next year. Albeit one kept in check by the less-than-pleasing trends of sluggish growth and a troubled jobs market.
“As a major importer of energy and food, the UK is particularly vulnerable to the disturbance of oil and gas markets and today’s data illustrates the initial impact with transport keeping CPI well above target at 2.8% in May. Core inflation also crept up to 2.6% from 2.5% in April.
“Having fallen back, energy prices may now remain elevated compared to pre-crisis levels over the rest of the year as depleted emergency reserves are rebuilt and production recovers. Combined with the delayed reaction on other major components of the inflation basket such as energy bills and food, it means inflation could stay high for the remainder of the year before falling back.
“However, feared ‘second round’ effects may be more limited. A decline in disposable incomes caused by inflation overtaking slowing pay growth suggests a soft patch for consumer spending, quelling demand-led pressure on prices. With a lid now on petrol and diesel prices, and the September fuel duty increase scrapped, it’s far from a ‘worst case’ inflationary scenario for UK households and businesses.”
Derrick Dunne, CEO of YOU Asset Management, comments:
“These figures continue to show something of the duality of inflation at the moment. On the one hand there is cause for concern with core CPI ticking up slightly and some raw material costs rising. Both these can work to send the headline rate higher in the coming months.
“More volatile measures such as food prices are however falling, which is positive for households which tend to feel the effects of grocery prices much more acutely. What is most surprising is the inflation threat really has failed to materialise in a serious way, as was predicted at the outset of the Iran conflict.
“With a notional deal now in place in the Middle East crisis the best-case scenario for the Government and Bank of England is that we have a short-term rough patch in the next few months, before inflation returns to its steady path to normalisation.
“For the rate setters considering this data, this probably means another hold is on the cards for tomorrow. Quiescent GDP data and labour market figures which aren’t quite flashing red suggest the economy might be in a bit of a stronger position than was previously feared – and therefore able to weather slightly higher rates than anticipated.
“Ultimately households should not expect conditions to get significantly easier in the next few months, but there is cause for some modest optimism at this juncture. Anyone unsure what this could mean for their long-term financial plans should consider consulting with a financial planner.”
Richard Pike, sales and marketing director at Phoebus Software, says:
“Inflation holding at 2.8% is an encouraging surprise, suggesting price pressures are easing more quickly than economists had expected and strengthening the case for the MPC to hold rates tomorrow.
“The announcement this week of a US–Iran peace agreement has helped push oil prices lower, which should reduce upward pressure on energy costs in the months ahead. However, some near-term inflation momentum is likely to persist.
“For borrowers and lenders, the outlook remains uncertain rather than directional. Inflation is still above the Bank of England’s target, and policymakers will want clearer evidence that pressures are sustainably easing before adjusting policy. As a result, mortgage rates are likely to stay elevated for now, even as expectations of rate cuts later this year begin to build.”
Paula Matthews, strategic relationship director at LGSS said:
“Unchanged inflation may not grab headlines, but it could prove just as significant as a rise or fall.
“Sometimes, the most valuable signal is the absence of change.
“For lenders, stability in inflation helps reinforce expectations around the broader economic outlook and gives markets more confidence in the assumptions sitting behind pricing and risk decisions.
“That does not mean uncertainty disappears. Affordability pressures remain and the outlook for interest rates will continue to depend on a range of economic indicators. However, a period of relative stability allows lenders to focus less on reacting to new shocks and more on executing against their existing plans.
“From a valuation and surveying perspective, consistency matters. Lenders still need confidence that decisions are being supported by robust data, appropriate valuation methodologies and experienced professional judgement.
“The apparent conclusion of hostilities in the Middle East should also ultimately improve confidence in addition to any objective impact on interest rates.
“Whether inflation rises, falls or remains unchanged, the underlying challenge is the same: making informed decisions in an environment where confidence can shift quickly.
“Stability does not remove that challenge, but it does make it easier to manage.”
Samuel Fuller, Director of Financial Markets Online, commented:
“This was a huge upside surprise. Many marketwatchers were convinced that April’s relatively modest inflation number was a fluke.
“But May’s numbers suggest that the inflationary tidal wave we had been expecting has just melted away.
“While services inflation came in hotter than forecast, most other numbers in the May report are a cooling balm for markets braced for soaring prices, and with them the chance of interest rate rises.
“While still well above the Bank of England’s 2% target, May’s annual CPI number almost feels benign.
“Food inflation has settled to its lowest level since December 2024, and at 0.2%, monthly CPI is exactly where it was a year ago. Input costs are moderating too, with separate data showing that crude oil prices fell 5.9% compared to April.
“All this means the Bank has no reason to increase interest rates any time soon. It’s instead likely to watch and wait, and if inflation stabilises further it may hold off on making any rate rises at all this year.
“This is a huge turnaround, as just a few weeks ago the swaps market was forecasting two 0.25% base rate rises by the end of 2026.
“Cue huge relief for the 1.8 million homeowners who are due to remortgage over the next year. The UK’s rapidly changing interest rate outlook could trigger a price war between mortgage lenders, many of whom will want to cut rates to make themselves more competitive.
“All this could cause the Pound slip against the Euro and the surging Dollar, but today’s numbers are an almost unalloyed win for UK consumers and Britain’s fragile economy.”
Jeremy Batstone-Carr, European Strategist, Raymond James Wealth Management, said:
“If the peace deal between the US and Iran holds and proves the basis for a lasting end to hostilities, the Bank of England’s interest rate setters should take comfort from the expectation that a weak economy and soft labour market will ensure that weak price pressures now are not a harbinger of higher prices to come. Clearly there remains considerable uncertainty as to whether the negotiated Middle East settlement will hold, so the Monetary Policy Committee will remain vigilant, but if it does, today’s soft May CPI data suggests that the chances of a precautionary rate hike tomorrow have diminished considerably.
“Consumer price inflation didn’t budge from April last month holding below March levels after April’s much anticipated weakness. Perhaps surprisingly, given the global energy price shock attributable to the conflict around the Persian Gulf, the increase in the monthly headline rate of inflation by 0.2% (holding the year-on-year rate at 2.8%) had little to do with fuel prices which actually dipped slightly after surging in March and April. Instead, a calculation adjustment associated with a recalibration of vehicle excise duty following an error in April data proved a rather technical justification for the higher index in May, and more generally, transport prices which hit their highest level since December 2022.
“Furthermore, unusually warm weather last month helped push services prices higher again after easing lower in April. While core CPI (excluding food and energy prices) edged back up by 0.1 percentage point to 2.6%, the Bank will take considerable heart from the fact that there are very limited indications of higher energy prices feeding indirectly into higher prices elsewhere.
“Rate-setters will take encouragement from the conclusion of a respected YouGov Survey which indicated that long-term inflation expectations dipped from 4.5%, a three-year high in March to 4.0% in May. We will have to wait until tomorrow to see the latest update from the labour market, but further evidence that conditions are softening will serve to allay fears that so-called second round effects, those associated with higher wage claims, remain absent.
“Although studiedly apolitical, the MPC will be well aware of tomorrow’s Makerfield by-election and its potential significance for the ruling Labour government and will hardly wish a policy decision to be viewed as favouring one party over another. On balance, the combination of (fragile) peace in the Middle East, a stagnating economy, loose labour market conditions and policy already deemed to be marginally restrictive, suggests that today’s data will not argue strongly for any alteration in the base rate of interest tomorrow.”
Richard Flax, Chief Investment Officer at Moneyfarm, comments:
“It was a modest positive surprise to see UK headline inflation hold at 2.8% in May, as consensus expectations had pointed to a move closer to 3%. This suggests underlying price pressures remain more finely balanced than anticipated. While higher transport and fuel costs, driven by recent energy market volatility linked to the Iran conflict, have pushed upwards, these have been offset by a broader easing in food prices, pointing to a more measured disinflation trend beneath the headline.
“For the Bank of England, the composition of inflation will matter as much as the level. With rates widely expected to remain on hold, policymakers are likely to focus on whether externally driven price pressures, particularly from energy, prove temporary or begin to feed more persistently into domestic inflation dynamics.”
Scott Gardner, investment strategist at J.P. Morgan Personal Investing said:
“UK inflation was flat during May, coming in below expectations despite higher energy prices continuing to weigh on UK households and businesses. This reading will provide some hope that any rebound in UK inflation could be short-lived after the announcement of a framework deal earlier in the week between the White House and Iran to stop fighting.
“Under the surface, the energy price spike was most visible for motorists who saw petrol prices peaking during May. Food prices tailed off slightly while core inflation was softer than many expected. Services inflation moved higher while raw materials also increased, putting pressure on businesses to either absorb higher costs or pass these on to buyers.
“While energy dynamics could trend higher in future readings, many will be closely watching to see how the Ofgem price cap hits inflation figures and household spending over the coming months. For Bank of England policymakers who are due to make their next rates decision imminently, this unchanged inflation reading could make the decision to hold interest rates in the short term more straightforward. Policymakers are likely to stay in ‘wait and see’ mode as the volatile Middle East situation continues to pan out and price pressures persist.”
Susannah Streeter, Chief Investment Strategist, Wealth Club, comments:
“Inflation remains above the Bank’s 2% target, disinflationary forces are creeping in. Housing and household services inflation eased to 2.7% from 3%, while food and non-alcoholic beverage inflation slowed further to 2.2% from 3%.
“This reinforces expectations that the Bank of England will press pause tomorrow and keep interest rates at 3.75%. It’s likely to mean policymakers will hold off on increasing rates until later in the year. It would give more time to assess if higher energy costs are being passed on, or if this is a temporary external force that will ease off more quickly. There’s even a small but growing chance that interest rate hikes could be taken off the table.
“With the economy struggling, the labour market looking weaker, and consumers staying wary, conditions are likely to continue to exert downward pressure on inflation, without tinkering with monetary policy.
“The latest drop in oil prices, which have fallen for the fifth session in a row, will also reassure policymakers that acute price pressures are easing. With the signing of the Iran deal set for Friday and more details coming through, Brent crude, the benchmark, has edged down to $78 a barrel, the lowest level since early March. Traders are increasingly pricing in the prospect of a significant boost to global supplies.
“The deal is set to include broad economic incentives for Tehran, including the immediate resumption of oil exports. At the same time, tanker traffic through the Strait of Hormuz is expected to start to normalise, although shipping companies remain wary about whether the agreement will hold and whether disruption could be sparked again. With repairs still ongoing to facilities across the Gulf region, this may also limit flows. This is why crude is still trading around 30% higher compared with January levels, before tensions in the Middle East began to ratchet up.”
George Lagarias, Chief Economist at Forvis Mazars, comments:
“The inflation reading was good, but the devil is in the details. On the face of it, a flat 2.8% reading on headline UK inflation, against a 3% expectation, and almost all of which attributed to transport costs, is good news. With a deal between the US and Iran brewing, we would expect prices to gradually de-escalate in the next few months. Having said that, businesses should not casually overlook the jump in services inflation from 3.2% a month ago to 3.7%. This sort of inflation, while still attributed to transport costs, can be stickier and it could require effort to bring down.”
Caitlyn Eastell, Personal Finance Analyst at Moneyfactscompare.co.uk, said:
“As prices rise and economic uncertainty persists, easy access accounts are playing a crucial role for households trying to keep emergency cash within reach. However, major high street banks are lagging, with their most flexible accounts offering just 1.16%^ collectively, leaving savers with little protection against rising prices. By contrast, some challenger banks are offering market-leading easy access rates of up 4.89%. Savers with £10,000 sitting in a big bank easy access account will earn just £116 a year, compared to the £489 they could earn just by switching to the best account. Once savers recognise this £373 yearly loyalty penalty the real-term benefit is difficult to ignore and they will be better off once they make the switch. It’s difficult to stay put when over 200 easy access accounts pay inflation-busting rates. Savers who move away from low-paying high street banks can grow the real value of their cash and stop emergency funds being eaten away by inflation.
“Savers may still be rewarded with even better deals, as savings rates may not have peaked yet. Markets are still pricing in a base rate hike, and a recent Bank of England survey found that 53% of people are expecting interest rates to rise this year. If proven right, banks and building societies are likely to pass this on as they’ll need to compete for deposits. As a result, headline rates may become more attractive, and the flexibility of an easy access account will allow savers to chase maximum returns. However, it’s a double-edged sword. Stubborn inflation means savers’ cash can still be losing power even when their balance ticks up on paper. This is why switching accounts regularly matters. Loyalty rarely pays and the best rates are typically reserved for new money, not existing customers.”
