LONDON, June 17 - British annual consumer price inflation held steady at 2.8% in May, unchanged from April's 13-month low, official statistics showed on Wednesday. The result came one day before the Bank of England is due to set its next policy rate.
Markets registered a modest reaction after the data, with sterling weakening slightly. Economists polled had been looking for a rise to 3.0% for May. The current level of inflation remains around a percentage point higher than the Bank of England's forecast published in January, a gap that policymakers and market participants continue to monitor closely.
Services price inflation - which the Bank regards as a key indicator of underlying domestic price pressures - increased to 3.7% in May from 3.2% in April, matching economists' expectations. Core inflation, which strips out food, energy, alcohol and tobacco, ticked up to 2.6% from 2.5%, a slightly smaller rise than had been anticipated.
Inflation has been above the Bank of England's 2% target for most of the past five years. In April the Bank warned that inflation was likely to climb above 3.5% by the end of the year, and that under its most adverse scenario it could exceed 6% in the early months of next year.
Geopolitical developments have played a role in recent price dynamics. The ongoing conflict between the United States and Iran has been cited as a factor keeping UK inflation higher than previously projected, in part because Britain relies heavily on imported natural gas. Financial markets this week have shown some relief from what appears to be an emerging agreement between the United States and Iran that would reopen the Strait of Hormuz, a principal route for oil exports. That agreement is expected to be signed in Switzerland on Friday.
On the policy front, economists surveyed expect the Bank of England's Monetary Policy Committee to vote 7-2 to hold the policy rate at 3.75%. Governor Andrew Bailey has indicated that the Bank has time to assess the effects of recent shocks on prices before moving. Nevertheless, some policymakers have expressed concern that businesses might use the current pause to push through broader price increases, or that the situation could undermine households' confidence in the Bank's ability to meet its inflation target.
The May inflation report therefore presents a mixed picture: headline inflation remains at its recent low, but underlying measures of domestic price pressure continue to show persistent strength. The Bank of England faces a decision point with fresh data arriving before its next meeting, while markets weigh the evolving geopolitics that influence energy and commodity flows and, by extension, domestic price trends.
Data snapshot
- Headline inflation (CPI): 2.8% in May, unchanged from April
- Services price inflation: 3.7% in May, up from 3.2% in April
- Core inflation: 2.6% in May, up from 2.5% in April
- Market expectations for Bank rate vote: economists expect a 7-2 vote to hold at 3.75%