UK Inflation Holds at 2.8% in May, Below Forecasts Amid Middle East Conflict Aftermath

Inflation in the UK held steady at 2.8% in the year to May, according to new figures from the Office for National Statistics (ONS). This figure was marginally below expert expectations, who had forecast a rise to 3% for the month.

Transport Costs Surge, Food Prices Ease

The ONS reported that transport costs experienced the fastest rate of increase over the year to May, rising by 6.8% compared to 4.5% in April, marking the highest annual rate since December 2022. This surge was attributed to escalating airfares, vehicle taxes, and petrol prices.

Conversely, the rate of price increases for food and non-alcoholic beverages decelerated significantly, falling from 3% in April to 2.2% in May. This marks the slowest rate of food inflation since December 2024, with reductions observed across various meat, dairy, and vegetable items.

Middle East Conflict's Lingering Impact

Economists have consistently projected inflation to peak between 3.5% and 4% in the latter half of 2026, as the broader economic repercussions of the conflict in the Middle East continue to filter down to household expenses. While domestic heating oil prices, which are not subject to a price cap, saw a decline after sharp increases linked to the conflict, concerns remain about future energy costs.

Yael Selfin, chief economist at KPMG UK, noted that despite recent progress in reopening the Strait of Hormuz, which could ease energy prices, the adverse impacts of supply chain disruption are already in motion. Household energy bills are still anticipated to rise by 13% next month.

Bank of England Decision Looms

The latest inflation data comes just before the Bank of England's Monetary Policy Committee is set to announce its next interest rate decision. Most economists expect the Bank to maintain the core interest rate at its current level of 3.75%, with the subdued inflation figures strengthening the case for a hold.

Chancellor Rachel Reeves asserted that the government is "protecting families and businesses from rising costs" through energy bill cuts and freezes on fuel duty and rail fares. She stated that despite global price increases driven by the Middle East conflict, the UK's economic plan has ensured inflation has "held steady."

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, cautioned that even with a US-Iran peace deal potentially slowing price rises, the UK faces a "painful hangover from the Iran conflict." He warned that energy and other supply chains are likely to take months to normalise, delaying any significant easing in inflation until late 2026.