Inflation slows to 3.4% but no Bank of England rate cut expected
Inflation eased to an annual rate of 3.4% in May, according to official figures just released, but the Bank of England is widely expected to leave interest rates on hold despite that.
The Office for National Statistics (ONS) reported that the consumer prices index measure eased from 3.5% the previous month.
It said that despite upwards pressure on prices from food and clothing, the decline was driven by falls in airfare prices following Easter.
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The headline figure also reflected a small downwards correction to ONS inflation data ahead of April related to vehicle excise duty calculations.
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."
Forecasts suggest that inflation will tick up over the second half of the year - with effects from Donald Trump's trade war and rising commodity costs amid events in the Middle East among the concerns ahead for the Bank of England.
It has adopted a "careful" and "gradual" approach to interest rate cuts as a result.
That is despite weakening employment data, reported earlier this month, which showed a tick up in the official jobless rate and a 109,000 reduction in payrolled employment.
The Bank is widely expected to leave Bank rate on hold on Thursday following the June meeting of its rate-setting committee.
LSEG data showed, ahead of the inflation data, that financial markets currently see two more interest rate cuts by the year's end.
Risks to prices ahead will come from a sustained Israel-Iran war pushing up oil and gas prices but there have been different views among policymakers over whether the trade war will result in inflation or not.
As such, the minutes of the Bank's meeting will be closely scrutinised for hints on whether rate cut caution is easing.
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The FTSE 100 (^FTSE) and European stocks climbed higher on Wednesday as UK inflation slowed to 3.4% in May amid an easing of transport costs. This was down from 3.5% in April, according to the Office for National Statistics, in line with City economists' forecasts but well above the central bank's 2% target. Transport prices rose by 0.7% in the 12 months to May, down from 3.3% in the year to April, reflecting drops in air fares (which jumped in April) and petrol prices, together with the correction of an error in vehicle excise duty prices. The largest downward contribution came from transport while upward momentum came from food, and furniture and household goods, the ONS said. Core inflation, which excludes food and energy, softened, falling from 3.8% to 3.5% — again matching forecasts. Money Markets still expect the Bank of England to hold interest rates on Thursday, with traders pencilling in a 10% chance of a cut. 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This was the largest downward contribution partially offsetting upward contributions from food, and furniture and household goods. The average price of petrol dropped by 2.1p between April and May to 132.4p per litre, compared with 148.8p in May 2024. Diesel prices fell 2.6p to 139.1p per litre, down from 156.3p a year earlier. Food and non-alcoholic drink prices picked up. Inflation in this category rose to 4.4% in the 12 months to May, up from 3.4% in April — the highest rate since February 2024, when it stood at 5%. The ONS said that the prices of chocolate, confectionery and ice cream rose between April and May but fell between the same months a year ago. It also said that meat prices rose by more this year than during the same period of 2024. ONS acting chief economist Richard Heys said: UK inflation fell to 3.4% in May, in line with economists' expectations, offering fresh evidence that price pressures may be starting to ease as the Bank of England prepares to announce its latest interest rate decision. The drop comes after inflation hit a 14-month high of 3.5% in April, driven by a wave of household bill increases. However, the Office for National Statistics (ONS) said an error in vehicle tax data meant April's inflation rate should have been 3.4%. Despite the mistake, the ONS has not issued an official revision. Core inflation, which excludes food and energy, also softened, falling from 3.8% to 3.5% — again matching forecasts. The statistics office said transport prices rose by 0.7% in the 12 months to May, down from 3.3% in the 12 months to April, reflecting drops in air fares (which jumped in April) and petrol prices, together with the correction of the error in vehicle excise duty prices. The latter was overstated in April and the series corrected from May. As is standard practice, the April figure has not been revised, the ONS said. Asian equity markets were mixed overnight, with the Hang Seng index (^HSI) leading the losses in the region, declining 1.1%. The Shanghai Composite ( was treading water while the Nikkei (^N225) defied the regional trend, advancing 0.9% to a four-month high, supported by a weaker yen. It came as Japan's exports in May fell 1.7% year-on-year, marking the most significant decline since September 2024, as the nation continues to face trade uncertainties. This drop was less severe than the 3.7% fall anticipated by Bloomberg, but represents a reversal from the 2.0% increase recorded in April. Japan's trade deficit swelled to -637.6bn yen in May, which is smaller than the expected -896.5bn yen, compared to a revised deficit of -115.6bn yen the previous month. Meanwhile the Kospi (^KS11) also made gains, up 0.7% on the day. Across the pond on Wall Street, the US dollar held onto most of its gains against its peers but stocks stayed under pressure. The Dow Jones (^DJI) finished 0.7% lower, at 42,215.80, and the S&P 500 (^GSPC) fell 0.8% to 5,982.72. Apart from energy, all the major sector groups lost ground, including the Magnificent 7 (-1.06%). The tech-heavy Nasdaq (^IXIC) shed 0.9%, closing at 19,521.09. One of the negative drivers on Tuesday was underwhelming US data across the board. Retail sales fell 0.9% in May, compared to the 0.6% fall expected, which was a second consecutive monthly decline. Industrial production also fell 0.2% in May (versus an expected no change). However, some of the core measures fared better, and the retail control group was up 0.4%, compared to the 0.3% expected. In the bond market, the yield on benchmark 10-year US Treasury notes dropped to 4.389% last night, from 4.454% late on Monday. Good morning, and welcome back to our markets live blog. As usual we will be taking a deep dive into what's moving markets and happening across the global economy. For the day ahead, the main highlight will be the Federal Reserve's latest policy decision, along with chair Powell's subsequent press conference. Data releases include US housing starts and building permits for May, the weekly initial jobless claims, and the UK CPI print for May. ECB speakers include Elderson, Escriva, Villeroy, Knot, Panetta, Nagel, Centeno and Lane. Here's a snapshot of what's on the agenda: G-7 leaders meeting day 2 7am: UK inflation data 9.30am: UK house prices and rents 10am: Eurozone inflation (final) for May 12pm: US MBA Mortgage Applications 1.30pm: US Housing starts for May and initial jobless claims 7pm: US Federal Reserve interest rate decision (no change expected)Rachel Reeves has said she knows there is 'more to do' as the inflation figure came in well above the Bank of England's 2% target. The chancellor said on Wednesday: Meanwhile, the shadow chancellor Sir Mel Stride, from the opposition Conservative party, said: Transport costs eased last month, pushing overall inflation lower. This was the largest downward contribution partially offsetting upward contributions from food, and furniture and household goods. The average price of petrol dropped by 2.1p between April and May to 132.4p per litre, compared with 148.8p in May 2024. Diesel prices fell 2.6p to 139.1p per litre, down from 156.3p a year earlier. Food and non-alcoholic drink prices picked up. Inflation in this category rose to 4.4% in the 12 months to May, up from 3.4% in April — the highest rate since February 2024, when it stood at 5%. The ONS said that the prices of chocolate, confectionery and ice cream rose between April and May but fell between the same months a year ago. It also said that meat prices rose by more this year than during the same period of 2024. ONS acting chief economist Richard Heys said: UK inflation fell to 3.4% in May, in line with economists' expectations, offering fresh evidence that price pressures may be starting to ease as the Bank of England prepares to announce its latest interest rate decision. The drop comes after inflation hit a 14-month high of 3.5% in April, driven by a wave of household bill increases. However, the Office for National Statistics (ONS) said an error in vehicle tax data meant April's inflation rate should have been 3.4%. Despite the mistake, the ONS has not issued an official revision. Core inflation, which excludes food and energy, also softened, falling from 3.8% to 3.5% — again matching forecasts. The statistics office said transport prices rose by 0.7% in the 12 months to May, down from 3.3% in the 12 months to April, reflecting drops in air fares (which jumped in April) and petrol prices, together with the correction of the error in vehicle excise duty prices. The latter was overstated in April and the series corrected from May. As is standard practice, the April figure has not been revised, the ONS said. Asian equity markets were mixed overnight, with the Hang Seng index (^HSI) leading the losses in the region, declining 1.1%. The Shanghai Composite ( was treading water while the Nikkei (^N225) defied the regional trend, advancing 0.9% to a four-month high, supported by a weaker yen. It came as Japan's exports in May fell 1.7% year-on-year, marking the most significant decline since September 2024, as the nation continues to face trade uncertainties. This drop was less severe than the 3.7% fall anticipated by Bloomberg, but represents a reversal from the 2.0% increase recorded in April. Japan's trade deficit swelled to -637.6bn yen in May, which is smaller than the expected -896.5bn yen, compared to a revised deficit of -115.6bn yen the previous month. Meanwhile the Kospi (^KS11) also made gains, up 0.7% on the day. Across the pond on Wall Street, the US dollar held onto most of its gains against its peers but stocks stayed under pressure. The Dow Jones (^DJI) finished 0.7% lower, at 42,215.80, and the S&P 500 (^GSPC) fell 0.8% to 5,982.72. Apart from energy, all the major sector groups lost ground, including the Magnificent 7 (-1.06%). The tech-heavy Nasdaq (^IXIC) shed 0.9%, closing at 19,521.09. One of the negative drivers on Tuesday was underwhelming US data across the board. Retail sales fell 0.9% in May, compared to the 0.6% fall expected, which was a second consecutive monthly decline. Industrial production also fell 0.2% in May (versus an expected no change). However, some of the core measures fared better, and the retail control group was up 0.4%, compared to the 0.3% expected. In the bond market, the yield on benchmark 10-year US Treasury notes dropped to 4.389% last night, from 4.454% late on Monday. Good morning, and welcome back to our markets live blog. As usual we will be taking a deep dive into what's moving markets and happening across the global economy. For the day ahead, the main highlight will be the Federal Reserve's latest policy decision, along with chair Powell's subsequent press conference. Data releases include US housing starts and building permits for May, the weekly initial jobless claims, and the UK CPI print for May. ECB speakers include Elderson, Escriva, Villeroy, Knot, Panetta, Nagel, Centeno and Lane. Here's a snapshot of what's on the agenda: G-7 leaders meeting day 2 7am: UK inflation data 9.30am: UK house prices and rents 10am: Eurozone inflation (final) for May 12pm: US MBA Mortgage Applications 1.30pm: US Housing starts for May and initial jobless claims 7pm: US Federal Reserve interest rate decision (no change expected)
