UK inflation remained at 2.8% in the year to May, according to the Office for National Statistics (ONS), unchanged from the previous month and still above the Bank of England's target of 2%. Economists had expected a slight rise to 3%, driven by the effects of the war in the Middle East, but a sharp fall in food inflation counteracted increases elsewhere, according to the BBC.
Inflation Figures and Market Expectations
The May reading surprised analysts, who had anticipated inflation would climb to 3% mainly due to the Middle East war. Instead, the rate held steady. The ONS measures inflation by tracking a virtual basket of hundreds of everyday items, regularly updated to reflect shopping trends. In 2026, items such as alcohol-free beer, dashboard cameras, and pet grooming equipment were added, while premium bottled lager and sheets of wrapping paper were removed.
The recent peace agreement between the US and Iran means that inflation could peak at a lower point than experts had forecast, though it is still expected to climb further, the BBC reported. Oil prices fell sharply after the deal was announced. However, analysts have warned that if the deal collapses, oil prices may rebound, which could cause inflation to rise.
Key Inflation Metrics
| Measure | Rate (Year to May) | Change from April |
|---|---|---|
| CPI (Overall) | 2.8% | Unchanged |
| Core CPI (Excluding food and energy) | 2.6% | Up from 2.5% |
| Bank of England target | 2.0% | — |
Factors Behind the Stubborn Rate
Inflation's persistence stems from a mix of forces. The government's energy price cap was reduced for the three months from April to June, cutting annual bills by £117 for a typical household. That helped lower the April figure. However, the next cap, taking effect on 1 July, is expected to be higher, reflecting increased wholesale energy costs, according to the BBC.
Food inflation saw a sharp decline in May, counteracting upward pressure from other categories. Because food and energy prices can be very volatile, the Bank of England also considers core inflation — which excludes those items — when deciding interest rate policy. Core CPI stood at 2.6% in May, up from 2.5% in April, indicating underlying price pressures remain.
Bank of England and Interest Rate Outlook
The Bank of England had previously warned that inflation could go as high as 6% in a worst-case scenario. Official forecasts published alongside Chancellor Rachel Reeves' Spring Statement in March had expected inflation to be at or around the 2% target over the next five years, but those predictions were made before the Iran war. The peace deal has since reduced the likelihood of extreme outcomes, the BBC reported.
Implications for Businesses and Investors
For corporate leaders and investors, the steady inflation reading reduces immediate pressure on the Bank of England to raise interest rates further, but the risk of renewed price increases from energy costs and geopolitical instability remains. The peace deal's impact on oil prices provides some relief, but the fragility of the agreement means companies should prepare for potential volatility in input costs. The next milestone is the July energy price cap announcement, which will be a key indicator of near-term inflation direction.
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