Inflation held steady at 2.8% in the 12 months to May, undershooting the expectations of many economists who had forecast a rise, according to the latest figures from the Office for National Statistics (ONS).
The unchanged rate, which matches April’s reading, was driven lower by the weakest food inflation in 17 months, helping to offset persistently high transport costs. Transport sector inflation stood at 6.8% in the year to May, with rising airfares, vehicle taxes and motor fuel costs pushing the overall headline figure up by 0.29 percentage points. That upward pressure was countered by food price inflation of just 2.2% — the lowest since December 2024 — which pulled the rate down by 0.07 percentage points. Additional downward contributions came from housing and household services, furniture, clothing, restaurants and recreation. Despite the steadying, inflation remains significantly above the Bank of England’s 2% target.
The figures arrive as the Bank of England’s Monetary Policy Committee (MPC) prepares to announce its latest interest rate decision at midday tomorrow. The MPC is composed of nine experts — five senior Bank of England staff and four external members — and is chaired by Governor Andrew Bailey. The committee meets every six weeks to vote on whether to raise, hold or cut the bank rate. At its last meeting on 30 April, the MPC voted by eight votes to one to hold rates at 3.75%, the lowest level since February 2023.
Most economists now expect the MPC to hold rates again tomorrow for the fourth consecutive meeting. A rate cut is widely regarded as unlikely given the risk that lowering borrowing costs while inflation is expected to rise could worsen the problem. Edward Allenby, senior economist at Oxford Economics, said: “Although energy prices remain elevated, most MPC members don’t appear close to voting for tighter policy. Early warning signs of indirect and second-round effects remain benign, and most members have argued that the weakness in the economy means the risks around the medium-term inflation outlook are two-sided. But these members are still likely to signal that they remain open to rate rises if necessary.” Oxford Economics forecasts a 7-2 vote in favour of holding, though future rate increases have not been ruled out.
The current 3.75% rate is a far cry from the ultra-low levels that prevailed for much of the decade after the 2008 financial crisis and the Covid-19 pandemic. Rates began rising sharply in 2022 as energy prices surged following the Russian invasion of Ukraine, peaking at 5.25% in August 2023 before being gradually lowered to their present level in December 2025. Before the outbreak of the Iran war, most economists had expected at least two rate cuts in 2026. Those forecasts have now been abandoned, with expectations shifting to rates remaining at 3.75% for the rest of the year — or potentially rising depending on how deep the inflationary shock from the conflict turns out to be.
The economic backdrop to tomorrow’s decision is decidedly mixed. Last week, the ONS reported that the UK economy contracted by 0.1% in April — the first monthly fall since August 2025 — as the disruption from the war in Iran began to take hold. The services sector declined by 0.2%, partly due to the cancellation of sporting events in the Middle East. The contraction marks a sharp reversal from the 0.6% growth seen in the first quarter of 2026, suggesting that the conflict has derailed what had been a fledgling economic recovery. While the three-month GDP growth to April remained positive at 0.7%, a prolonged period of contraction would tip the economy into a recession if negative growth continued for two consecutive quarters.
The labour market is also showing signs of softness. Unemployment rose to 5.0% in the three months to March, its highest level in almost six years, while wage growth slowed to 3.4% — also the slowest in six years. Although high unemployment and weak wage growth are painful for households, orthodox economic theory holds that a softer labour market acts as a disinflationary force: when people lose income, they spend less, which can help bring down inflation and, in turn, provide the MPC with room to cut rates.
How the Middle East conflict is driving UK costs
The most significant factor weighing on the UK economy and inflation outlook is the ongoing conflict in the Middle East, specifically the disruption to trade through the Strait of Hormuz. Since 28 February, hostilities have made transporting goods through the region extremely risky, and the narrow waterway between Iran and Oman — through which roughly 20% of the world’s oil and gas is transported — has remained effectively closed to most commercial shipping. The security situation has made transit commercially unviable for most carriers, and while signs of recovery have emerged ahead of an anticipated official reopening on 20 June, maritime traffic remains far below pre-war levels. Mine clearance operations could take 40 to 50 days.
The closure has sent oil prices soaring. Before the war, a barrel of Brent crude averaged around $70. Once hostilities began, prices quickly became high and volatile, peaking at around $114 in May and hovering between $90 and $100 for most of the period. News of a peace deal between the US and Iran caused prices to plummet as traders anticipated the reopening of the strait. However, even if a full peace agreement is signed and implemented, the economic consequences will be felt for some time. Restarting oil production and distribution chains is a slow process, and the effects of four months of elevated prices are expected to linger for the rest of the year and potentially into 2027.
The impact on UK households is already being felt through energy costs. Wholesale energy prices surged after the strait closed, and this will be reflected in the next energy price cap, which comes into effect on 1 July. The cap for a typical household will rise by approximately 13%, reaching £1,862 per year — an increase of around £216. Prices are expected to remain at this elevated level until at least 2027, according to most forecasts.
Oil prices affect the cost of far more than just petrol and diesel. Everyday items such as crayons, plastic bags and iPhones all depend on petroleum-based components, meaning the price shock has rippled through the entire supply chain. Eight out of ten UK businesses have reported being negatively affected by the conflict, citing higher energy and fuel costs, increased shipping expenses and disruptions to their supply chains.
The new energy price cap will add around £216 to the average annual bill when it kicks in on 1 July, while the Strait of Hormuz is expected to reopen on 20 June, though the mine clearance operations that follow could take up to 50 days to complete.
