British consumer inflation remained unchanged at 2.8% in May, according to official data released Wednesday, surprising economists who had anticipated an acceleration. The steady reading comes just one day before the Bank of England's latest monetary policy announcement, providing a key data point for policymakers and investors.
The Consumer Prices Index (CPI) rose by 2.8% in the 12 months to May 2026, matching the annual rate recorded in April. On a monthly basis, CPI increased by 0.2%, the same pace as in May 2025. The broader CPIH measure, which includes owner-occupiers' housing costs, also held steady at 3.0% annually, with monthly growth of 0.2%.
Inflation Defies Expectations
The reading came in below the consensus forecast of 3.0% from economists polled by Reuters. Instead, inflation remained at the 13-month low reached in April. Following the release, sterling weakened slightly as markets digested the lower-than-expected figure.
This data arrives just ahead of the Bank of England's interest rate decision on Thursday. Markets currently expect the central bank to keep rates unchanged, given persistent inflation above its 2% target and ongoing geopolitical uncertainties.
Transport Costs Drive Inflation Higher
According to the Office for National Statistics, transport made the largest upward contribution to the monthly change in both CPIH and CPI annual inflation rates. However, this was partially offset by lower inflation in food and non-alcoholic beverages, which provided the largest downward contribution to annual price growth.
The data suggests that while some sectors continue to experience price pressures, easing food costs helped prevent a broader acceleration in inflation during the month.
Mixed Signals from Core Inflation Measures
Underlying inflation indicators presented a mixed picture. Core CPIH, which excludes energy, food, alcohol, and tobacco, increased by 2.8% annually, unchanged from April. Within this measure, goods inflation slowed to 2.0% from 2.4%, while services inflation rose to 3.6% from 3.4%.
Meanwhile, Core CPI rose to 2.6% in May from 2.5% in April, slightly below economists' expectations. The annual inflation rate for CPI goods slowed to 2.0% from 2.4%, while CPI services inflation accelerated sharply to 3.7% from 3.2%. The Bank of England closely monitors services inflation as an indicator of underlying domestic price pressures.
Focus on Future Inflation Risks
Inflation has remained above the Bank of England's 2% target for most of the past five years. In April, the central bank projected inflation would rise above 3.5% by the end of 2026 and could potentially exceed 6% in an adverse scenario. Economists cite the impact of the US-Iran conflict as one factor keeping British inflation higher than the BoE had projected in January, with Britain particularly exposed due to its reliance on imported natural gas.
However, financial markets have recently taken comfort from signs of an agreement between the United States and Iran that could reopen the Strait of Hormuz, a key route for global oil exports. The agreement is reportedly expected to be signed in Switzerland on Friday.
While BoE Governor Andrew Bailey has indicated that policymakers have time to assess the economic effects of the conflict, some MPC members remain concerned that businesses could pass higher costs on to consumers more broadly or that the situation could weaken public confidence in the central bank's ability to control inflation.
For context, similar inflationary pressures are being felt globally. The ECB recently hiked rates to 2.25% as the Middle East conflict drove inflation above 3%, while US inflation hit 4.2% in May amid surging energy costs. Meanwhile, the dollar has remained steady as markets await further economic data.
This article is for informational purposes only and does not constitute financial advice.
