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Banks (Finance)

UK Inflation Falls in May, But Remains Above 2% Target

Strategic Insights

— 2 min read

UK inflation dropped in some areas, driven by decreased air fares and motor fuel prices, while some food prices increased and household goods costs rose. The Office for National Statistics reported that the consumer prices index (CPI) was 3.4 per cent in May, down from a revised 3.4 per cent in April. The inflation rate has been dropping since reaching a high of 11.1 per cent in October 2022. Acting Chief Economist Richard Heys noted that air fares fell in May, compared to a large rise at the same time last year, and motor fuel costs dropped. However, rising food prices, particularly items such as chocolates and meat products, and increased costs of furniture and household goods partially offset these declines.

Key Takeaways:

  • The Consumer Prices Index (CPI) was 3.4 per cent in May, down from a revised 3.4 per cent in April.
  • The inflation rate has been dropping since reaching a high of 11.1 per cent in October 2022.
  • Air fares fell in May, compared to a large rise at the same time last year, and motor fuel costs dropped.
  • Rising food prices, particularly items such as chocolates and meat products, and increased costs of furniture and household goods partially offset these declines.
  • The cost of living for households may be more accurately reflected by the Consumer Prices Index including owner occupiers' housing costs (CPIH), which also remained flat in May at 4.0 per cent.
  • Thomas Pugh, chief economist and tax and audit firm RSM, noted that the figures were in part due to "some unwinding of the huge increase in airfares" and a rebound in clothes prices.
  • Oil prices have risen 12 per cent in the past week and are expected to impact future inflation rates, which will be influenced by the UK's economic response to higher interest rates.
  • The Bank of England's MPC is widely expected to hold the base rate at 4.25 per cent, ahead of further potential cuts later in 2025.

Statistics:

  • Inflation rate in May: 3.4 per cent (CPI)
  • Inflation rate in April (revised): 3.4 per cent (CPI)
  • Highest inflation rate: 11.1 per cent (October 2022)
  • Drop in air fares compared to same time last year: significant
  • Motor fuel costs drop: significant
  • Rise in food prices: particularly items such as chocolates and meat products
  • Increased costs of furniture and household goods: including fridge freezers and vacuum cleaners
  • CPIH (Consumer Prices Index including owner occupiers' housing costs) in May: 4.0 per cent
  • Oil price rise in the past week: 12 per cent
  • Brent Crude Oil price: briefly surged above $77 before falling back
  • Bank of England's base rate: 4.25 per cent (expected to be held ahead of further potential cuts)

Sources:

  • Office for National Statistics
  • RSM (tax and audit firm)
  • Bank of England
  • Reuters (credited with the article)

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