UK inflation holds steady at 3.4% in May, matching forecasts

UK inflation held steady at 3.4% in May, matching economist forecasts, based on figures published Wednesday by the Office for National Statistics. 

The number was identical to the revised estimate for April, which had originally been reported as 3.5% before the ONS admitted there was a miscalculation due to vehicle tax data.

The mistake in April’s figure came from incorrect data tied to car taxation. The ONS later said the true figure for April should have been 3.4% as well. But even after identifying the error, the ONS decided not to revise the published number because their policy avoids editing past inflation releases.

For May’s inflation print, they used the corrected vehicle tax data. So the official May consumer price index reflects that fix.

ONS flags transport as main factor behind monthly change

Core inflation, which leaves out food, alcohol, tobacco, and energy, fell from 3.8% in April to 3.5% in May. The ONS said transport costs made the biggest downward impact on the overall inflation rate. But it wasn’t a clean drop—food, furniture, and household goods kept inflation under pressure.

Richard Heys, acting chief economist at the ONS, explained it like this: “A variety of counteracting price movements meant inflation was little changed in May.” Richard also said airfare prices fell compared to the same time last year, mainly because Easter and school holidays landed in different weeks. He added that motor fuel costs also dropped in May, pushing down overall prices in the transport sector.

The British pound ticked up 0.22% against the US dollar, reaching $1.345 after the inflation figures came out. Investors appeared unmoved, seeing no real surprise in the numbers.

Speaking after the data release, UK Finance Minister Rachel Reeves responded by saying, “The Treasury has taken the necessary choices to stabilise the public finances and get inflation under control.” But Rachel also admitted, “there’s more to do.”

Bank of England holds back, looks ahead to August rate decision

The inflation data landed right before the Bank of England’s next monetary policy meeting scheduled for Thursday. With inflation still running well above the 2% target, the central bank is expected to leave interest rates unchanged at 4.25%. Analysts believe the bank will delay its next rate cut until August, assuming no further surprises come from energy markets or economic data.

Back in early 2025, the Bank had forecast inflation to climb to 3.7% in Q3 before finally cooling next year. But things have changed since then. Fresh conflict between Israel and Iran has brought oil prices back into the inflation debate. The risk now is that those prices keep rising and push UK inflation higher than originally expected.

Rob Wood, chief UK economist at Pantheon Macroeconomics, said inflation could average 3.4% this year, but he expects it to rise slightly and peak at 3.6% in September. Rob said the current print doesn’t include the full effect of the latest spike in oil prices, which came after tensions escalated in the Middle East.

“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,” Rob said.

Crude oil futures jumped over 4% on Tuesday after President Donald Trump told Iran’s Supreme Leader Ayatollah Ali Khamenei to agree to what he called an “unconditional surrender.” That headline alone pushed global oil markets into a frenzy and added more weight to the inflation outlook for the next quarter.

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