UK inflation remained unchanged at 2.8% in May, defying expectations of a rise to 3%, as slowing food prices offset higher transport costs. The Office for National Statistics reported that motor fuel prices were up 25% year-on-year, but the overall inflation figure suggests that fuel price rises have not yet spilled over into the wider economy.
The benign reading comes three months after Iran choked off oil supplies through the Strait of Hormuz, sparking fears of soaring inflation and aggressive interest rate hikes. However, a series of better-than-forecast economic data has raised hopes that the impact of the Middle East war on the cost of living may be more muted than initially feared.
Food prices actually fell 0.1% month-on-month, indicating that firms lack the pricing power to pass on higher energy costs to cash-strapped consumers. Bank of England Governor Andrew Bailey has noted this trend, contrasting it with the 2022 Ukraine crisis when strong consumer demand allowed firms to push through price increases.
Economists have downgraded their inflation forecasts for the coming months and cast doubt on the prospect of future rate rises. The Bank of England is widely expected to hold interest rates at 3.75% at its Thursday meeting, with any potential rise now more likely in November than September.
The recent US-Iran peace deal has reopened the Strait of Hormuz, pushing oil prices below $80 a barrel and eliminating the Bank's worst-case scenario. Analysts suggest the next move by the Monetary Policy Committee could be a rate cut as concerns shift from inflation to the weakening jobs market.
