May inflation at 3.4% as energy conflict clouds outlook
British inflation cooled in May to an annual rate of 3.4%, in line with expectations, as the Bank of England prepares to decide on interest rates amid rising geopolitical tensions. The figure, released Wednesday by the Office for National Statistics, matched the Reuters consensus and offered no surprises to economists or markets.
The BoE is widely expected to keep its benchmark rate on hold during its policy decision Thursday. With Middle East conflict pushing oil prices up 14% in just over a week, policymakers are likely to maintain a cautious stance. Markets currently price in a 90% probability of no change this week and expect two quarter-point cuts by year-end.
Energy and services trends shape policy outlook
While geopolitical risks complicate forecasts, the inflation data offered some relief. Core inflation—excluding volatile items like rents and holidays—fell below 4% for the first time since February 2022. Services inflation, a key BoE measure, dropped to 4.7% from 5.4%, precisely matching the central bank’s projections.
“This will undoubtedly complicate the BoE’s task,” said Sanjay Raja, Deutsche Bank’s UK chief economist, pointing to the tug-of-war between falling domestic inflation and rising global energy prices. The weakening UK labor market may, however, help suppress further inflation pressures, he noted.
Mixed inflation drivers, food costs remain a concern
Despite improvements in core metrics, several sectors saw sharp price increases. Food prices rose 4.4% year-over-year in May, the largest jump in over 12 months. Goods inflation rose by 2%, the fastest pace since November 2023. Meanwhile, airfares declined sharply after peaking during the Easter season in April, helping pull overall CPI lower.
The ONS also confirmed that April’s inflation reading was overstated by 0.1 percentage points due to an error in government car tax data. While April’s figures were not revised, the correction was applied to May’s release.
BoE faces political and economic pressure
Britain continues to post the highest inflation among 16 Western European nations with comparable data, according to Reuters. While some BoE officials challenge the central bank’s assumption that inflation will revert without lasting effects, the majority view remains cautious as global uncertainty intensifies.
The BoE last cut rates on May 8 to 4.25% in a split vote, with some committee members favoring a deeper cut. The central bank expects inflation to peak at 3.7% later this year, although some economists believe April may have marked the high point.
