Inflation reached 3.4 per cent in the year leading up to May, according to official data. This is likely to be the last set of data that Bank of England officials will review before making a decision on interest rates this Thursday.
The Office for National Statistics (ONS) released data showing that growth in service prices, which is closely watched by rate-setters, slowed down to 4.7 per cent from 5.4 per cent in April, as reported by City AM.
A Bloomberg survey of economists predicted inflation would reach 3.3 per cent in the 12 months to May, although City analysts had varying views, with Goldman Sachs forecasting higher inflation than Pantheon Macroeconomics.
The ONS reported that the prices of chocolates and meat products increased, while the cost of furniture and household goods also contributed to the rise in inflation. “A variety of counteracting price movements meant inflation was little changed in May,” stated Richard Heys, chief economist at the ONS.
“Air fares fell this month, compared with a large rise at the same time last year, as the timing of Easter and school holidays affected pricing. Meanwhile, moto fuel costs also saw a drop.”
Chancellor Rachel Reeves claimed that the government had made the “necessary choices” to bring inflation “under control”, contrasting it with the spike seen in late 2022 under Liz Truss’ tenure. However, he acknowledged that the recent surge above three per cent was partly due to employment tax increases.
“We know there’s more to do,” added Reeves.
“Last week we extended the £3 bus fare cap, funded free school meals for over half a million more children, and are delivering our plans for free breakfast clubs for every child in the country. This government is investing in Britain’s renewal to make working people better off.”
This month, economists are likely to scrutinise the data more closely after the previous month’s inflation figure was revised down to 3.4% due to a tax calculation error – an unprecedented move that has eroded businesses’ confidence in the national statistics body.
The ONS has maintained its recorded April inflation data at 3.5% in accordance with its established procedures.
The Bank of England’s Monetary Policy Committee (MPC) may address the ONS’ handling of key data in the minutes of its monetary policy decision, scheduled for public release at 12 pm on Thursday.
Due to concerns over high wage growth, rate-setters are widely expected to keep interest rates at 4.25%.
Inflation worries fail to subside
According to Monica George Michail, economist at the National Institute for Economic and Social Research (NIESR), inflation is expected to remain above 3% for the remainder of the year due to the “inflationary effects from higher government spending”.
“The current tensions in the Middle East are causing greater economic uncertainty,” she stated. Experts anticipate the Bank of England will not alter rates this Thursday and predict just one more reduction throughout the year.
Capital Economics’ Ruth Gregory opined that a surge in food price inflation to its highest point since early February would likely concern those setting rates.
“[It] will be a bit of a blow for the Bank as it perhaps provides a tentative sign that firms are passing on more of April’s rise in national insurance contributions in their selling prices.”
British Retail Consortium insight director Kris Hamer pointed out that the uptick in food price inflation follows alerts that high street retailers could not entirely mitigate additional labour costs brought in by Reeves.
“Ensuring no shop pays more under business rates reform would be a meaningful step forward, offering much needed relief to an industry that continues to see prices, job losses and store closures all rising,” stated Hamer.
Bank officials remain concerned about elevated inflation expectations amongst consumers and businesses for the year ahead, coupled with a dwindling confidence in the UK economy.
However, dovish members of the rate-setting committee, Alan Taylor and Swati Dhingra, have pushed for further cuts in interest rates amid expectations that President Trump’s assertive trade stance will burden the global economy.
Dhingra has reasoned that tariffs will likely lead to a deflationary influence on prices, as the introduction of cheaper goods into the UK market becomes more probable.
Although Trump has lowered tariffs on some of the US’ biggest trading partners, including China, global economists at the World Bank and IMF anticipate that friction will hamper GDP growth. The upcoming meeting is expected to shed light on the Bank’s perspective on the impact of global trade on UK inflation, although some economists are concerned that companies may raise prices to alleviate concerns.
