UK Inflation Slows to 3.4% – No Rate Cut Expected Yet

Airfares and fuel prices ease, but rising food and household costs keep Bank of England cautious

Inflation Falls Slightly in May

UK inflation slowed to 3.4% in May, down from 3.5% in April, according to the Office for National Statistics (ONS). While the dip offers modest relief, economists say it's unlikely to trigger an immediate interest rate cut from the Bank of England.

What’s Behind the Decline?

The fall was largely driven by:

• Cheaper airfares, due to the later timing of Easter and school holidays
• A drop in motor fuel prices
• A downward revision to earlier inflation data linked to vehicle tax adjustments

However, these reductions were partially offset by:

• Rising costs of food items such as chocolates and meat
• Increases in white goods and household products like fridge freezers and vacuum cleaners
• Persistent clothing price pressures

“A variety of counteracting price movements meant inflation was little changed in May,” said ONS acting chief economist Richard Heys.

Core Inflation Shows Improvement

There were signs of easing in underlying price pressures:

• Core CPI (excluding food and energy) fell to 3.5%, from 3.8% in April
• Services inflation dropped more sharply, from 5.4% to 4.7%

These trends suggest that the worst of the inflation surge may be behind us, but concerns remain over future cost pressures.

No Immediate Rate Cut Expected from Bank of England

Despite the dip in inflation, the Bank of England is expected to hold interest rates steady following its June meeting.

• Officials have signalled a “gradual and careful” approach to rate cuts
• Financial markets, however, are still pricing in two rate cuts before the end of 2025, according to LSEG data

Weakening employment figures — including a rise in the jobless rate and a 109,000 drop in payrolled jobs — are adding pressure for cuts, but the Bank remains focused on price stability amid global uncertainties.

Global Risks Could Derail Further Inflation Progress

Analysts warn that several external risks could push inflation higher again later this year:

• A potential escalation of conflict between Israel and Iran, which could spike oil and gas prices
• The impact of Donald Trump’s revived trade war, which could disrupt global supply chains

While there’s division among policymakers about how inflationary these risks might be, the Bank of England’s next steps will likely hinge on how these global factors evolve.

Market Focus: All Eyes on Rate Meeting Minutes

Investors and analysts will closely watch the minutes from the Bank of England’s meeting for any signs that the Monetary Policy Committee is softening its stance.

A more dovish tone could signal that a rate cut is on the horizon later in the summer—especially if core and services inflation continue to fall and job market data weakens further.

Summary

• UK inflation eased to 3.4% in May, slightly down from 3.5%
• Falling airfares and fuel prices offset by rising food and household costs
• Core and services inflation show improvement, adding support for future rate cuts
• Bank of England likely to keep rates unchanged this month
• Global risks from Middle East conflict and trade tensions remain key threats
• Financial markets anticipate two rate cuts by end of 2025

Sources: (BBC.co.uk, SKY.com)