UK inflation has held at a higher than expected rate after air fares and motor fuel dropped in price.
The Office for National Statistics said that its key measure of inflation, the consumer prices index, was 3.4 per cent in May - having also been 3.4 per cent after revised figures in April, its highest level for more than a year.
Inflation in the UK had been dropping, having reached a high of 11.1 per cent in October 2022. A rise for April was expected due to raised labour costs, rising energy bills and changes to social housing costs, among other factors. But the leap was above the expected figure and led Chancellor Rachel Reeves to acknowledge disappointment at the rise.
A drop in some areas for May will therefore be taken as a limited positive, though inflation remains some distance above the Bank of England’s government-mandated 2 per cent target.
While fuel dropped for May, food prices increased to the highest rate in 12 months, while household goods also went up.
In particular, chocolate is rising at the fastest rate since records began in 2016. With cocoa harvests hit by bad weather and firms passing on labour and energy cost increases, chocolate prices are rising at 17.7 per cent year on year. The Food and Drink Federation said “UK businesses face significantly higher industrial energy costs compared to other nations” and noted the price of cocoa has tripled in the last two years.
Butter (18.2 per cent), beef and veal (17.0 per cent), coffee (13.9 per cent) and lamb and goat (11.2 per cent) also saw notable price inflation in May, while prices fell fastest for olive oil (-6.0 per cent), pasta products and couscous (-6.0 per cent) and rice (-2.9 per cent).
“Our number one mission is to put more money in the pockets of working people through our Plan for Change,” said Ms Reeves after the publication of the inflation data. “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.
“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."
By way of response, Sir Mel Stride MP, Shadow Chancellor of the Exchequer, said: “This morning’s news that inflation remains well above the 2 per cent target is deeply worrying for families. Labour’s choices to tax jobs and ramp up borrowing are killing growth and stoking inflation – making everyday essentials more expensive. To plug the hole they have created, we now know Rachel Reeves has a secret plan to raise taxes. Make no mistake – more taxes are coming.”
Explaining the changes which impacted on inflation, ONS acting chief economist Richard Heys said: “A variety of counteracting price movements meant inflation was little changed in May.
“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, motor fuel costs also saw a drop.
“These were partially offset by rising food prices, particularly items such as chocolates and meat products. The cost of furniture and household goods, including fridge freezers and vacuum cleaners, also increased.”
CPI vs CPIH
The headline figure of 3.4 per cent inflation refers to Consumer Prices Index (CPI), the commonly used measure of tracking inflation.
However, the ONS also hands out another inflation rate called CPIH: Consumer Prices Index including owner occupiers' housing costs. This is the data set which includes CPI factors but also adds in the costs associated with owning and maintaining a home, including council tax.
ONS say this is the most comprehensive measure of inflation, to more accurately reflect the changing cost of living for households.
As such, CPIH also remained flat in May at 4.0 per cent.
Thomas Pugh, chief economist and tax and audit firm RSM noted the figures were in part due to “some unwinding of the huge increase in airfares - which saw the biggest monthly rise since 2011 - and package holidays, as these were almost certainly due to the timing of Easter”. However, Mr Pugh also pointed out that “some of that [was likely] offset by a rebound in clothes prices, which fell by the most on record in April.”
Oil and interest rates
Future inflation rates across 2025 are largely expected to head downward, as the BoE continues to keep a tight leash on higher interest rates.
However, that direction may now be in question as the situation develops with Israel and Iran. Missiles sent into Tehran gave fears of rising escalations, with Iran - which exports more than 1.5m barrels a day - controlling a key shipping route which they could close off in the event of any full conflict.
That would in turn see oil prices rise enormously. The price of Brent Crude Oil has already risen 12 per cent in the past week and briefly surged above $77 before falling back, having spent much of the past two months in the low 60s.
The second factor impacted by this inflation data is interest rates, with the BoE’s MPC due to meet on Thursday for their latest decision.
While unemployment has risen and wage growth has slowed, last month’s inflation rise plus these latest geopolitical developments mean the MPC is widely expected to hold the base rate at 4.25 per cent, ahead of further potential cuts later in 2025.
Richard Carter, head of fixed interest research at Quilter, said: “Core inflation—which strips out energy and food—now stands at 3.5 per cent, continuing to ease, and providing the Bank of England with a mixed picture ahead of its rate decision tomorrow.
“While inflation has steadily declined from its double-digit peak, today’s data reinforces just how tricky the final stretch of disinflation can be. Price pressures in the services sector remain elevated but have slightly cooled from 5.4 to 4.7 per cent. But geopolitical tensions in the Middle East could inject further volatility into the path ahead.
“Data integrity issues, such as the recent 0.1 percentage point overstatement in April’s estimate due to vehicle tax misreporting, have also heightened uncertainty regarding the reliability of key indicators.
“Markets are still pencilling in a rate cut in August, but if inflation proves stubborn or global risks intensify, the Bank may be forced to wait. For investors and households alike, this period is a reminder that we are not out of the woods just yet.”
