Bags of potatoes grown in the United Kingdom at the D & F McCarthy Ltd. fresh fruit and vegetable wholesaler in Norwich, UK, on Tuesday, Feb. 28, 2023. An acute shortage of salad items on UK supermarket shelves has sparked a political debate, with some people in the industry blaming Brexit while others say its a smokescreen for different problems. Photographer: Chris Ratcliffe/Bloomberg via Getty Images
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The U.K.’s annual inflation rate hit 3.4% in May, in line with economist expectations, according to data released by the Office for National Statistics (ONS) on Wednesday.
The ONS had initially published data showing a 3.5% increase in the 12 months to April, but later said a car tax data miscalculation had led to the print being overstated. The April print would have been 3.4% without this error.
The statistics body said at the time that its general policy is not to revise inflation figures so it left the original data in place. On Wednesday, it said the corrected vehicle tax data had been used when producing the May consumer price index.
May core inflation, which excludes more volatile energy, food, alcohol and tobacco prices, rose by 3.5% in the year to May, down from 3.8% in the twelve months to April.
The ONS said the largest downward contribution to the monthly change in the annual rates of inflation came from transport, while the largest — and partially offsetting — upward contributions was from food, furniture and household goods.
“A variety of counteracting price movements meant inflation was little changed in May,” Richard Heys, acting chief economist at the ONS, commented Wednesday.
“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.”
The British pound rose 0.22% against the dollar, at $1.345, following the release of the prints.
Responding to the data, U.K. Finance Minister Rachel Reeves said the Treasury had taken “the necessary choices to stabilise the public finances and get inflation under control,” but acknowledged “there’s more to do.”
Bank of England waits in the wings
The inflation data will be in focus for the Bank of England as it tries to determine the best course for interest rates amid a stubbornly high inflation rate and lackluster economic growth.
The central bank is widely expected to hold interest rates steady at its next meeting on Thursday, mindful of inflationary pressures. Economists expect policymakers to move to cut rates by 25 basis points at the next gathering in August, however.
The latest inflation data “won’t cause the Bank to deviate from its quarterly rate cutting path,” Ruth Gregory, deputy chief U.K. economist at Capital Economics, said in emailed comments Wednesday.
“With services inflation still elevated at 4.7%, the small fall in CPI inflation from 3.5% in April to 3.4% in May won’t prompt the Bank of England to deviate from its recent quarterly rate cutting path. The Bank looks nailed on to keep rates unchanged at 4.25% tomorrow and we expect the next 25 basis point rate cut in August.”
Earlier this year, the Bank of England said it expects the inflation rate to rise to 3.7% in the third quarter, before starting to cool into next year. With conflict erupting in the Middle East, oil prices and supply chains could be further disrupted, potentially pushing consumer prices up more than initially expected.
Rob Wood, chief U.K. economist at Pantheon Macroeconomics, said his team expect inflation to bounce around the current inflation rates for the rest of the year for a 3.4% average. He anticipates the print will peak at 3.6% in September. Oil price rises on the back on the conflict between Israel and Iran could push those figures higher.
“We are yet to fully factor in higher oil prices following events in the Middle East — we use a 15-day average of prices to smooth volatility — but would need to raise the inflation peak to 3.7% if oil and natural gas prices are sustained at their current levels. We would bump up the peak to 3.8% if oil prices reach $80 a barrel and natural gas prices match those rises proportionately,” he said.
Crude oil futures rose more than 4% on Tuesday, after U.S. President Donald Trump demanded an “unconditional surrender” from Iran’s supreme leader, Ayatollah Ali Khamenei.
