Britain’s annual inflation rate held steady at 2.8% in May, coming in below expectations and surprising economists who had forecast a climb higher.
Economists polled by Reuters had anticipated the annual inflation rate would rise to 3% in May, making the flat reading a modest but notable relief.
The steady print follows a dip to 2.8% in April, which was largely attributed to a change in the UK’s regulated energy price cap.
That April drop was widely expected to be temporary, with the price cap due to rise by 13% later this summer, pushing energy costs to a two-year high.
Britain’s Office for National Statistics said transport was the biggest contributor to rising prices in May, partially offset by falling food and non-alcoholic drink prices.
Air fares surged 10.3% month-on-month, while motor fuel and sea fares also lifted transportation costs for British consumers during the month.
Analysts noted the timing of the Easter holiday this year may have contributed to the spike in travel fares across the board.
The price of gasoline rose by an average 0.6 pence per liter between April and May, reaching its highest level since November 2022, when energy prices spiked in the wake of Russia’s full-scale invasion of Ukraine.
The UK’s May reading came in below the euro zone’s 3.2% figure for the same month and well below the US May inflation rate of 4.2%.
At its most recent meeting, the Bank of England’s Monetary Policy Committee voted to keep its key interest rate at 3.75%, with policymakers noting that “monetary policy cannot influence energy prices.”
That comment referenced the impact of the US-Iran war, which has kept oil and gas prices elevated for months amid the closure of the Strait of Hormuz.
Markets are pricing in a 95% chance that the Bank of England holds rates steady at its next meeting on Thursday, according to LSEG data, though traders expect a hike by the end of the year.
Over the weekend, the US and Iran announced a framework deal to end their nearly four-month war, with both President Donald Trump and Iranian officials confirming the Strait of Hormuz will reopen after the agreement is signed in Geneva.
Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said the latest data “will provide some hope that any rebound in UK inflation could be short-lived.”
Gardner added that “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.”
He further noted that “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.”
Gardner concluded that “policymakers are likely to stay in ‘wait and see’ mode as the volatile Middle East situation continues to pan out and price pressures persist.”
