Slowing food prices offset rising transport costs

Durrant Pate/Contributor

UK inflation stays at 2.8% unexpectedly, as the Bank of England (BoE) prepares to set interest rates.

The unchanged reading on the consumer price index measure of inflation (CPI) confounded economists’ expectations of a 3% increase, which was projected. This came amid rising energy and transport costs caused by the Iran conflict, reflecting that the impact of the war on prices might be more muted than feared.

The inflation outturn was offset by slower increases in food prices. Core inflation, which strips out more volatile commodities such as energy and food, rose to 2.6% last month, from 2.5% in April. 

Inflation details

Transport costs made the largest contribution to the inflation rate, rising at a rate of 6.8% in May, from 4.5% in April, the highest since December 2022. Air fares increased by 10.3% between April and May, compared with a 5% fall between the same two months in 2025. 

This rise may have been influenced by the timing of Easter, in early April this year, and the school holidays. European flights, in particular, increased in price. Higher prices at the petrol pumps as well as the cost of ferry tickets also contributed to the increase in transport costs. 

However, rising transport costs were offset by food price inflation easing to 2.2%, the lowest since December 2024. Despite this, analysts are predicting that food inflation could move still higher in the coming months, as the increased costs faced by farmers, processors and manufacturers often take several months to filter through to prices on supermarket shelves.

Eagerly anticipated BoE response

Meanwhile, the Treasury’s cost of borrowing fell after the unexpectedly benign inflation reading, with the yield (or interest rate) on 10-year government bond dropping to 4.74%, the lowest in a month. Weaker-than-expected inflation as a result of the conflict could lessen the need for the BoE policymakers to raise interest rates in the coming months. 

The Bank’s nine-member monetary policy committee will set rates tomorrow and was already widely expected to leave them on hold at 3.75% before the inflation number further firmed up those bets. The closure of the strait of Hormuz to shipping has driven up oil prices over the past three months, with knock-on effects for the cost of fuel products, chemicals and fertiliser.

Economists hope the agreement reached between Donald Trump and the Iranian regime at the start of the week will reopen the maritime choke point in the coming weeks, easing price pressures.

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said a US-Iran peace deal could help to stop inflation rising further, although supply chains and energy prices would take several months to normalise.