UK inflation unexpectedly holds steady at 2.8% in May

[LONDON] UK inflation unexpectedly held steady in May, suggesting price pressures were weaker than feared even before a US deal to end the Iran war sent energy costs tumbling.

Consumer prices rose 2.8 per cent compared with a year earlier, unchanged from April, the Office for National Statistics said on Wednesday (Jun 17). It was below economists’ expectations for inflation to hit 3 per cent.

The ONS said inflation was held down by food and non-alcoholic drinks. Price growth in the services sector – which is monitored for signs of domestic pressures – still climbed to 3.7 per cent, more than forecast.

The figures appear to support the wait-and-see approach favoured by some Bank of England rate-setters as they meet this week.

Markets were expecting rates to remain at 3.75 per cent on Thursday but the agreement to end the Middle East conflict and reopen the Strait of Hormuz has raised questions over whether any hikes will be needed at all. Markets are now pricing in just one.

The agreement has caused energy prices on markets to tumble and raised hopes any inflationary fallout can be controlled. 

SEE ALSO

UK economy shrinks in April as Iran war starts to take its toll

Asean Intelligence

Get insights into businesses across South-east Asia

Get the free report

However, an increase in UK household energy bills is already locked in for July when the country’s price cap is next updated. The 13 per cent increase in the cap is set to add 0.4 percentage points to inflation, according to Bloomberg Economics.

Officials are trying to balance a weak labour market against the threat that inflation that’s well above their 2 per cent target could trigger a feedback loop as firms pass on costs and workers demand higher wages. BLOOMBERG