UK inflation held steady at 2.8% in May, matching April’s rate and defying expectations of a further slowdown, official data released today by the Office for National Statistics (ONS) confirmed. The Consumer Prices Index (CPI) figure, unchanged from the previous month, marks the first time inflation has remained flat since September 2023, according to the ONS. Economists polled by Reuters had forecast a decline to 2.7%, underscoring the persistence of underlying price pressures.
Food inflation eased slightly to 3.2% from 3.6% in April, but core inflation—excluding volatile energy and food costs—rose to 3.5%, up from 3.4%. The ONS attributed the stability to a mix of factors, including higher-than-expected service sector price growth and a slower-than-anticipated drop in clothing costs. “The upward pressure on services inflation is a key driver,” said Jonathan Athow, deputy national statistician at the ONS. “This reflects ongoing labor market tightness and strong demand in sectors like hospitality and professional services.”
Why is inflation sticking at 2.8%?
Analysts point to three primary reasons for the unexpected plateau. First, wage growth remains elevated, with average weekly earnings (excluding bonuses) up 5.9% year-on-year in the three months to April, according to the ONS. Second, housing costs—particularly rents—continue to climb, with private rental prices up 7.8% annually. Third, the Bank of England’s (BoE) decision to hold interest rates at 5.25% in May has not yet fully suppressed demand in key sectors.
“The labor market is still overheating, and with unemployment at a 50-year low of 3.8%, firms are struggling to cut wages,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “Until we see a meaningful slowdown in job growth, inflation is unlikely to drop sharply.” The BoE’s latest Monetary Policy Report, published in May, projected CPI to fall to 2.5% by the end of 2024, but today’s data suggests a slower descent.
How does this compare to other measures?
While CPI inflation has stabilized, other metrics tell a more mixed picture. The Retail Prices Index (RPI), which includes housing costs, rose to 4.0% in May—above the BoE’s 2% target. Meanwhile, the ONS’s experimental “core goods” inflation measure, which excludes food, energy, and services, fell to 0.1%, indicating deflation in goods prices. “The divergence between goods and services inflation is widening,” noted Andrew Goodwin, senior economic advisor at PwC. “This reflects global supply chain improvements on the one hand, but domestic service-sector bottlenecks on the other.”
A breakdown of the ONS data shows clothing prices rose 0.8% month-on-month—the largest increase since 2022—while transport costs fell 0.1%, driven by lower fuel prices. However, the BoE’s Financial Stability Report warned last month that “persistent services inflation” could delay rate cuts, with some officials now expecting the first reduction in late 2024 rather than the previously anticipated June.
What happens next for the Bank of England?
The BoE’s next policy decision is scheduled for June 20, with markets pricing in a 60% chance of a 25-basis-point rate cut, according to Bloomberg data. However, today’s inflation figures have tightened those odds. “The BoE will be watching June’s data closely, but the ball is now in their court,” said Ruth Gregory, senior UK economist at Capital Economics. “If inflation ticks up again, they may need to hold rates for longer to avoid reigniting price pressures.”
Governor Andrew Bailey has repeatedly stressed that the BoE’s priority is “bringing inflation back to target sustainably.” In a speech last month, Bailey noted that “inflation expectations remain well-anchored,” but today’s data may force a reassessment. The BoE’s Inflation Report in August will be critical, as it will set the tone for the remainder of the year.
Meanwhile, the UK government’s Fiscal Sustainability Report, due in July, will assess the impact of inflation on public finances. Chancellor Jeremy Hunt has signaled no major tax changes in the upcoming Autumn Statement, but rising debt servicing costs—now over £100 billion annually—could limit fiscal flexibility.
What does this mean for households?
For British households, the steady inflation rate offers little relief. The Resolution Foundation think tank calculated that a typical UK family is still £1,200 worse off annually compared to pre-pandemic levels, adjusted for inflation. “The cost-of-living crisis isn’t over,” said Torsten Bell, chief executive of the Resolution Foundation. “While inflation isn’t spiraling, wages aren’t keeping up, and the squeeze on real incomes continues.”
Supermarket chains reported mixed results this week, with Tesco’s CEO Ken Murphy noting that “food inflation is finally easing, but not fast enough for shoppers.” Meanwhile, energy price caps—due for review in October—remain a wild card. Ofgem’s latest projections suggest bills could rise by up to £300 annually for the average household if wholesale costs climb.
The ONS will publish June’s inflation figures on July 16, with economists divided on whether the trend will break. “The next few months will be pivotal,” said Liz Martins, chief economist at HSBC. “If services inflation softens, we could see a sharper decline. But if wage growth stays strong, the BoE may have to act sooner than expected.”
