Key facts
- UK inflation remained unchanged at 2.8% in May, contrary to economists' expectations of a rise to 3%.
- The cost of motor fuels increased by 25% year-on-year in May.
- Food prices saw a month-on-month decrease of 0.1%.
- US inflation reached a three-year high of 4.2% in May.
- Bank of England Governor Andrew Bailey suggested firms have limited 'pricing power'.
UK inflation remained unexpectedly steady at 2.8% in May, defying economists' forecasts of a rise to 3%. This data suggests that the impact of the Middle East conflict and subsequent oil supply disruptions through the Strait of Hormuz on the UK's cost of living may be more muted than initially feared.
While motor fuel prices saw a significant year-on-year increase of 25% in May, the broader inflation picture was benign, with food prices even declining month-on-month. This indicates that higher energy costs have not yet broadly permeated the economy, a situation contrasted with the broad-based inflation seen in 2022 following Russia's invasion of Ukraine.
Bank of England Governor Andrew Bailey has noted that firms appear to lack the 'pricing power' to pass on increased costs to consumers, who are already facing financial pressures. This observation, coupled with the softer inflation data, has led economists to downgrade their inflation forecasts and question the likelihood of further interest rate hikes by the Bank of England.
Despite the current stability, the full impact of higher fertilizer prices, which rely on transit through the Strait of Hormuz, is expected to unfold over several months. Nevertheless, recent developments, including a potential US-Iran peace deal that has lowered oil prices, have eased the Bank's worst-case inflation scenarios. Analysts still anticipate the Monetary Policy Committee will hold interest rates at 3.75% at its upcoming meeting, with markets now pricing a potential rate rise in November rather than September.