The United Kingdom’s inflation rate remained steady at 2.8% in May, defying expectations of an increase and suggesting that the Bank of England (BOE) may maintain current interest rates at its upcoming meeting. According to the Office for National Statistics (ONS), inflation held flat compared to April, while economists had predicted a rise to 3.0%. Despite ongoing upward pressure from energy prices, which saw motor fuel costs increase by 25% compared with May 2025, the overall inflation rate did not rise as anticipated.
In addition to energy costs, prices for services also increased notably. Air fares jumped by 10.3% between April and May, although this surge may have been influenced by the earlier timing of Easter this year. Meanwhile, food and nonalcoholic drink inflation dropped to its lowest point since December 2024. This combination of factors points toward a more moderate indirect impact from higher global energy prices than previously expected.
Economists like Andrew Wishart from Berenberg highlight that these trends strengthen the argument for the BOE to adopt a cautious approach and possibly avoid raising interest rates this year. However, the planned 13% increase in the cap on home-energy prices in July indicates that inflationary pressures related to energy will persist despite recent diplomatic developments, such as the interim agreement between the U.S. and Iran aimed at reopening the Strait of Hormuz.
The BOE has been closely monitoring inflationary pressures beyond energy costs because sustained increases in these areas could lead to higher wage demands and further price rises across the economy. Yael Selfin, chief economist at KPMG UK, noted that while motorists have faced higher petrol prices since March, easing energy prices linked to progress on reopening the Strait of Hormuz could reduce some strain. Nevertheless, existing disruptions in energy supplies are expected to continue influencing inflation in the near term.
Producer prices also showed signs of rising pressure in May, with raw material input costs accelerating at their fastest pace since February 2023. The BOE’s outlook from its April meeting projected inflation to peak slightly above 3.5% by year-end before declining. A more severe scenario had anticipated inflation surpassing 6% early in 2027, but if shipping through the Strait of Hormuz resumes promptly, such extreme outcomes are less likely.
Following news of the U.S.-Iran agreement on social media, energy prices fell sharply but have yet to return to pre-conflict levels. This development caused markets to lower expectations for tighter monetary policy by the BOE this year. In contrast, the European Central Bank recently raised its key interest rate due to significant increases in energy costs within the eurozone.
As both the UK and eurozone rely heavily on imported energy, fluctuations in oil and natural gas prices remain critical factors influencing monetary policy decisions. Bank of England Governor Andrew Bailey has indicated that the bank is willing to tolerate inflation temporarily exceeding its target level as it carefully balances these complex economic dynamics.
