UK inflation eases to 3.4% in May

UK inflation eased slightly to an annual rate of 3.4% in May, down from 3.5% in April, according to figures released this morning by the Office for National Statistics (ONS). While the modest dip offers a glimmer of relief for households and businesses, the Bank of England is widely expected to keep interest rates on hold when it meets later this week.

The ONS attributed the decline primarily to a drop in airfares, following Easter, and a technical adjustment related to vehicle excise duty (VED), which had previously overstated inflation figures for April. However, price pressures from food, clothing, and household goods remained firm.

“UK inflation remains elevated, without including the latest jump in energy prices,” said George Lagarias, Chief Economist at Forvis Mazars.

“Consumers are beginning to feel the heat of inflation again… the Bank of England is being proven right to wait before cutting rates.”

Stripping out volatile elements such as food and energy, core CPI inflation fell to 3.5% in May from 3.8% in April. Services inflation, a key focus for the Bank, saw a sharper decline, dropping to 4.7% from 5.4%.

Meanwhile, the CPIH measure, which includes housing costs, dipped to 4.0% from 4.1% on an annual basis. On a monthly basis, both CPI and CPIH rose by just 0.2%, indicating some slowing in price momentum.

Despite these movements, economists remain cautious. Forecasts suggest inflation may rise again in the second half of the year, driven by rising commodity costs, geopolitical tensions in the Middle East, and uncertainty surrounding US trade policy under Donald Trump’s administration.

Mixed picture for small businesses

For small businesses, the slight easing of inflation brings little relief.

Neil Rudge, Chief Banking Officer for Commercial at Shawbrook, noted: “The modest decline makes one thing clear: the pressures facing small businesses aren’t going anywhere fast.

“SMEs are being required to absorb more and more – higher wages, increased employer National Insurance contributions and ever rising material costs – but often without the profit margins required to do so,” he said, adding that while businesses are clinging to hopes of further inflation falls later this year, ongoing global instability clouds the outlook.

Policy path unclear

While the downward trend in inflation offers reassurance that the Bank of England’s tough stance on rates is working, the case for imminent rate cuts remains weak.

Lagarias cautioned: “With the war in the Middle East pushing energy prices higher, that transportation offset might very well disappear by next month. We wouldn’t be too surprised if the central bank ended up delivering less than two rate cuts until the end of the year.”

All eyes will now turn to the Bank of England’s Monetary Policy Committee decision on Thursday, where it is widely expected to maintain rates at 5.25%, prioritising stability amid persistent inflation risks and uncertain global economic headwinds.