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UK inflation remained well above the Bank of England’s official target at 3.4 per cent in May, in an indication that persistent price pressures have yet to recede as the central bank prepares to set interest rates on Thursday.
Wednesday’s reading from the Office for National Statistics matched forecasts in a Reuters poll of analysts and marked a decline from April’s 3.5 per cent figure, which the ONS has since said was overstated because of an error in car taxes.
The figure comes as the outlook for inflation is further complicated by the intensifying conflict in the Middle East, which risks pushing oil prices higher. Economists said May’s data strengthened expectations that the Monetary Policy Committee would keep rates at 4.25 per cent.
Ruth Gregory at Capital Economics said: “May’s figures were in line with the Bank’s expectations, so today’s release is unlikely to move the needle much for the Bank.”
The main factor behind the fall in May’s headline figure was transport prices, which were pulled down by a correction to vehicle excise duties following the ONS’s error in April. The statistics agency has said that month’s number was overstated by 0.1 percentage point.
Declines in volatile air fares and fuel also weighed on May’s rate, according to the ONS, which added that the biggest upward pressures came from food, and furniture and household goods.
The MPC, which has an inflation target of 2 per cent, has cut interest rates four times since last summer as it grapples with lacklustre growth and persistent price pressures.
Last month the MPC lowered borrowing costs by a quarter point to 4.25 per cent, but minutes from the meeting revealed sharp divisions among the nine policymakers over the threat from inflation.
Traders expect the central bank to deliver two more quarter-point cuts this year, with the next move coming in September, according to levels implied by the swaps market.
Following the figures, the pound edged up 0.3 per cent higher to $1.346.
Services inflation, a key measure of underlying price pressures for rate-setters, slowed to 4.7 per cent in May, from 5.4 per cent in April, according to the ONS.
The services inflation reading was in line with the BoE’s own forecasts, but Andrew Wishart at Berenberg Bank said the figure remained too high for comfort.
Analysts say the government’s decision to lift employer national insurance contributions, alongside increases in the minimum wage, is adding to costs faced by businesses.
“The big picture remains that UK services inflation is proving more stubborn than that in other major economies due to policy-induced increases in labour costs,” said Wishart.
Responding to May’s data, chancellor Rachel Reeves said: “We took the necessary choices to stabilise the public finances and get inflation under control after the double-digit increases we saw under the previous government, but we know there’s more to do.”
Additional reporting by Emily Herbert in London