Inflation holds steady at 2.8% as food price rises ease

Danni Hewson, head of financial analysis at AJ Bell, said: “It would be churlish not to at least quietly celebrate the fact that prices haven’t risen by as much as many economists had feared.

“May’s inflation figures could give some hope to UK households that the dreaded cost of living squeeze might not be as intense as feared.

“Food prices actually fell by 0.1 per cent between April and May, and year-on-year food inflation in May was at the lowest level it’s been since December 2024.

“Airfares and petrol prices shot up as the price of a barrel of Brent crude bobbed around $100 for most of the month, but since the announcement of a US-Iran deal the price has plummeted and today it’s below $80 a barrel.

“Today’s numbers will be scrutinised by the Bank of England’s rate setters when they gather tomorrow, and market expectation is near 100 per cent that there will be no rate rise at this meeting. There’s even increasing speculation that any hike might be off the table for the rest of the year.

“But it’s not all good news, especially when you consider that before the start of the Iran war inflation had been expected to be back to the Bank’s two per cent target by now and many were expecting interest rates to be cut at least once this year.

“Disruption to global supply chains and the elevated oil price has already impacted input costs, which shot up by a whopping 8.7 per cent in May.

“Whilst consumer caution and a weak economy is expected to limit the extent to which those costs can be passed on, some price increases are already baked in.

“The all-important core inflation data edged up in May too, as the service sector passed on additional costs. This will trouble rate setters, especially those already minded to vote for the kind of insurance hike delivered by the ECB last week.

“But a weak labour market and sluggish growth will play a significant part in limiting the secondary effects which played a huge part in keeping inflation higher for longer after Russia’s invasion of Ukraine.

“If a permanent truce is agreed, it’s likely those worst-case scenarios can be filed in the rubbish bin.”