Key Takeaways
- UK inflation held steady at 2.8% in May, the same as in April.
- Consensus forecasts had put CPI as high as 3%.
- The Bank of England announces its next rates decision on Thursday and is likely to hold rates again.
UK inflation unexpectedly held steady at 2.8% in the 12 months to May this year, the latest data shows, after a record rise in transport costs was offset by slower-than-expected food and drink price increases. This was below FactSet forecasts for a 3% increase in the Consumer Prices Index.
Core CPI, a measure of inflation excluding more volatile energy and food prices, rose by 2.6% in the 12 months to May, the Office for National Statistics said. That’s up from 2.5% in the 12 months to April.
Economists were expecting a much more significant increase in May’s figures because of the Iran conflict and its knock-on effects on petrol and heating costs. The lifting of the Ofgem energy price cap from July 1 is still expected to lead to increase in domestic energy prices.
What Is Happening to UK Inflation?
The most significant upward contributor to May’s inflation data was transport costs, including fuel and airfares, both of which have risen significantly thanks to rising oil prices. The price of petrol rose by 0.6p per liter between April and May, ONS said, compared with a 2.1p per liter fall between April and May last year.
Prices in the transport segment rose overall by 6.8% in the 12 months to May 2026, ONS said, up from 4.5% in the 12 months to April—the highest annual rate since December 2022, when UK inflation began to rise dramatically following the covid pandemic.
“The main effects behind the increase in the transport rate came from airfares, motor fuels, and sea fares,” ONS said. An early April Easter holiday may also have artificially stoked the increase in May, it added. The timing of flight pricing prior to the Iran conflict played a role in higher prices too.
Despite this significant increase in transport costs, slower price increases in food and non-alcoholic beverages helped offset transport price inflation, and had the most significant restraining effect on overall price rise data.
Will the Bank of England Cut Interest Rates This Week?
Despite welcome news in this latest inflation data, experts still fear the UK’s inflation data will “deteriorate” in coming months as a clearer picture emerges of the knock-on effects of the closure of the Strait of Hormuz on fuel prices. The Bank of England is expected to hold rates once more at 3.75% this week but higher inflation data could lead the Bank to raise rates in future. Still, current futures prices show a below 50% likelihood of rate increases for meetings until April 2027.
“Economists are predicting that the Bank of England will keep rates on hold, a decision that now makes even more sense given today’s inflation reading,” says Morningstar chief European markets strategist Michael Field.
“It may take some time for inflation to fall to the Bank’s 2% target, but fears of runaway inflation are much lessened from a month ago.”
Zara Nokes, global market analyst at J.P. Morgan Asset Management, expects higher inflation in the coming months but no reaction from the Bank of England to tighten monetary policy.
“The UK inflation picture will deteriorate from here as the full effects of the Middle East conflict feed through to energy and food prices over the coming months,” she says.
“However, this is not an environment where the Bank of England should be hiking rates. We are in a very different world to 2022; rates are already in restrictive territory, financial conditions are tight and the labor market is showing clear signs of deterioration, reducing the risk of an ugly wage-price spiral forming,” she adds.
“Increasing interest rates would therefore risk unnecessarily adding to growth headwinds at a time when the economy is losing momentum.”
James Smith, developed markets economist at ING, also expects no change from the Bank but higher inflation data in the coming months.
“May’s lower-than-expected UK inflation figures are the latest data point questioning the need for rate hikes. We see inflation peaking around 3.5% in September on current energy prices. That’s unlikely to justify a rate rise from the Bank of England,” he says.
ING now expects the Bank of England to resume rate cuts in 2027, having reduced interest rates twice in 2024 and four times in 2025.
