Key Takeaways

• CPI steady at 2.8%: UK inflation was unchanged from April’s 13-month low — well below the 3.0% forecast by economists and the BoE’s own 3.3% projection.
• Sterling weakens slightly: The pound dipped against the dollar following the softer-than-expected print.
• Gilt yields fall: UK government bond yields dropped to a new two-month low on the data.
• Rate hike bets trimmed: Investors slightly reduced expectations for a BoE increase later in the year.
• BoE expected to hold tomorrow: Economists polled by Reuters see a 7-2 vote to keep rates at 3.75%.
• Food and energy offset airfares: Lower prices for meat, vegetables, dairy, and domestic heating oil offset a jump in airfares and petrol.
• Airfares volatile: A 10.3% monthly jump in airfares partly reflected Easter timing distortions between 2025 and 2026 data.
• Services inflation rises: To 3.7% from 3.2% in April — in line with expectations but a concern for policymakers.
• Core inflation at 2.6%: Slightly below the 2.7% forecast, up from 2.5% in April.
• Manufacturing costs jump 8.7%: Raw material costs posted their biggest annual rise since February 2023 due to the Iran war.
• Iran deal changes the calculus: Friday’s Switzerland signing raised hopes the inflation peak is now lower than feared.
• Pantheon’s Wood revises down: Now sees inflation peaking at 3.4% in November — down from 3.6% before the deal — and no longer expects a BoE rate hike this year.
• KPMG’s Selfin: “Today’s data strengthens the case for a continued cautious approach from the Bank of England.”
• Long-run inflation expectations at record: A BoE survey showed five-year public inflation expectations hit 3.9% — the highest since the series began in 2009.
• Worst-case BoE scenario avoided: The central bank had warned inflation could exceed 6% early next year under its most adverse scenario.

British inflation held at 2.8% in May — unchanged from April’s 13-month low and below forecasts from both economists and the Bank of England — official figures showed on Wednesday, a day before the central bank’s next interest rate decision.

Sterling weakened slightly against the U.S. dollar after the data, British government bond yields fell to a new two-month low, and investors trimmed their expectations for a rate increase later in the year.

Economists polled by Reuters had forecast a rise to 3.0% for May, and the BoE in April had predicted an increase to 3.3% as the U.S.-Israeli war on Iran kept British inflation almost a percentage point higher than the central bank had forecast in February.

Lower prices than in April for meat, vegetables, dairy products, and domestic heating oil helped offset a jump in airfares and petrol prices, the Office for National Statistics said on Wednesday.

UK Inflation Has Long Been Above Target

Inflation has been above the BoE’s 2% target for most of the past five years. In April, the BoE said it was likely to rise above 3.5% by the end of the year and potentially exceed 6% early next year under the most adverse of three scenarios.

However, financial markets this week have drawn comfort from an interim agreement between the United States and Iran — which promises to reopen the Strait of Hormuz and is due to be signed in Switzerland on Friday.

“Today’s data strengthens the case for a continued cautious approach from the Bank of England,” said Yael Selfin, chief economist at KPMG.

Economists polled by Reuters expect the BoE’s Monetary Policy Committee to vote 7-2 to keep rates on hold at 3.75%.

While Governor Andrew Bailey says the BoE has time to assess the impact of the conflict, some policymakers worry businesses will use it to raise prices more broadly, or that it could dent households’ confidence in the inflation target.

A quarterly BoE survey released last week showed the public’s expectations for inflation in five years’ time were the highest since the series began in 2009 — at 3.9%.

Volatile Airfares and Sticky Services

Britain has been more affected than most Western countries by the conflict due to its reliance on imported natural gas, and manufacturers reported an 8.7% annual rise in their raw material costs for May — the biggest since February 2023.

“A chunk of inflation is locked in the system now,” said Rob Wood, chief economist at Pantheon Macroeconomics. He now predicts inflation will peak at 3.4% in November — down from his previous forecast of 3.6% before the Iran deal — and no longer expects the BoE to raise rates this year.

Services price inflation — which the BoE views as a guide to underlying price pressures — rose to 3.7% in May from 3.2% in April, in line with economists’ forecasts.

The rise in services inflation partly reflected a 10.3% monthly jump in airfares, which are volatile. High Easter prices were not captured in April 2026 data but were reflected in 2025 figures.

Core inflation — which excludes food, energy, alcohol, and tobacco — rose slightly less than expected to 2.6% from 2.5%.