Inflation in Great Britain remained unchanged at 2.8% in May, against expectations for 3% rise, while core inflation, which excludes volatile food, energy, alcohol and tobacco components, rose slightly less than expected to 2.6% from 2.5% in April.
Annualized inflation was unchanged at the lowest in over one year, hit in April, and slightly eased expectations for a rate hike later this year.
Lower prices for domestic heating oil, meat, vegetables and dairy products were behind better than expected May’s figures that helped to partially offset negative impact from jump in airfares and fuel prices.
Inflation in the UK has been above the 2% target for most of the past five years, with BoE’s projections to rise above 3.5% by the end of the year and potentially exceed 6% early next year, in the worst scenario.
Services price inflation, the BoE gauge for underlying price pressures – rose to 3.7% in May from 3.2% in April, which made a large contribution to 10.3% monthly jump in airfares.
May’s data, although slightly better than expected, add to BoE’s stance of continued cautious approach to the monetary policy, even though that the latest potential peace deal between US and Iran, which would result in in reopening the Strait of Hormuz, sparks fresh optimism.
The BoE’s MPC will meet on Thursday and is widely expected to keep interest rates unchanged at 3.75%, with main narrative that the BoE has time to wait to assess the impact of the conflict, before deciding to start raising interest rates.
On the other hand, some policymakers worry businesses will use that time to raise prices more broadly, that could add tailwinds to consumer prices and dent consumer confidence, as Britain has been the most affected from the Western countries by the war in the Middle East, due to its reliance on imported natural gas, which was reflected by 8.7% annual rise in raw material costs for May, the biggest since February 2023.
