UK Inflation Stagnates at 13-Month Low Ahead of BoE Decision

The Office for National Statistics reported that falling costs for staples including meat, vegetables, and dairy, alongside lower domestic heating oil prices, successfully countered a sharp surge in petrol and airfare costs. While the 2.8% figure provides a moment of relief, inflation remains comfortably above the Bank of England’s 2% target, where it has lingered for most of the past five years.

Financial markets are currently buoyed by an interim U.S.-Iran agreement aimed at reopening the Strait of Hormuz, a critical oil export corridor. This development is expected to temper the energy-driven volatility that has plagued the British economy. Yael Selfin, chief economist at KPMG, noted that the latest figures reinforce the case for a cautious stance from the Monetary Policy Committee. Most analysts anticipate a 7-2 vote to maintain interest rates at 3.75% during Thursday’s meeting, as Governor Andrew Bailey seeks further clarity on the conflict's long-term economic fallout.

Underlying pressures remain a point of concern, however. Services price inflation climbed to 3.7% from 3.2% in April, driven largely by a 10.3% monthly spike in airfares. Furthermore, manufacturers reported an 8.7% annual increase in raw material costs, the sharpest rise since early 2023. While core inflation, which strips out volatile food and energy components, ticked up modestly to 2.6%, policymakers remain divided on whether businesses will use external geopolitical tensions as a pretext to broader price hikes.