UK inflation unexpectedly held steady in May, easing pressure on the Bank of England as policymakers prepare to announce their latest interest rate decision this week.
The consumer prices index rose by 2.8% in the year to May, figures from the Office for National Statistics showed, unchanged from April and below economists' forecasts for an increase to 3.0%. Monthly inflation slowed more sharply than expected, to 0.2% from 0.7% in April.
The lower-than-expected reading gave economists more confidence that the Bank's monetary policy committee will not increase borrowing costs at this week's meeting or for the rest of the year, particularly after oil prices retreated amid signs of a diplomatic breakthrough between the US and Iran.
Sanjay Raja, chief UK economist at Deutsche Bank, said the report would be welcomed by policymakers who want lower rates.
"Today's CPI report will be one for the doves," he said, noting that headline inflation, core inflation and food prices all came in below expectations.
Thomas Pugh, economist at RSM UK, agreed that the figures "eliminate any lingering chance" of a rate hike at Thursday's MPC meeting "and will go a long way to taking a hike in July off the table as well".
Rob Wood, chief UK economist at Pantheon Macroeconomics, said the rise in services inflation to 3.7% from 3.2% was a stronger signal of underlying price pressures but added that the overall figures would support an expected decision to leave interest rates unchanged.
"The inflation figures will support the MPC's highly likely decision to keep Bank Rate on hold this week and make a July hike less likely," said Wood.
A slowdown in food and drink inflation helped offset stronger services inflation. Food and beverage price growth fell to 2.2% from 3.0% in April, while prices for clothing, furniture, restaurants and hotels also showed signs of easing.
Inflation remains below the MPC's own April projections, with headline CPI 40 basis points below the Bank’s forecasts and services CPI 20bps below.
Financial markets had increased bets on higher interest rates earlier this year as oil prices surged during tensions in the Middle East. However, those expectations have eased sharply in recent weeks as crude prices have fallen.
Economists still expect inflation to rise later this year as higher energy and supply chain costs feed through to consumers, especially with an Ofgem energy price cap hike of 13% coming for July. But most now see a lower peak than previously feared, wiping out the likelihood that the Bank will need to raise rates again.
With a US-Iran ceasefire deal in sight, the prospects of further softening of CPI have increased, said Deutsche's Raja.
"Oil prices have already dropped meaningfully, tracking around 10% below last month’s market assumptions. This will slowly flow through the inflation data over the summer and winter.
"And, in even better news, the fall in oil prices has coincided with a fall in gas prices. It’s looking increasingly likely that the Ofgem price cap could be lower as opposed to higher come October 2026, bringing some much-needed relief for UK households and businesses."
Not only will the BoE not need to hike this year to curb inflation pressures, said Kallum Pickering at Peel Hunt, it "can likely even ease policy to support activity towards the end of the year".
He said markets were overestimating the risk of future rate rises. While higher oil prices could temporarily push inflation up, he argued that weaker demand, slowing inflation momentum and tighter financial conditions meant the Bank was more likely to hold rates through the summer before cutting later in 2026 as price pressures eased.
