UK inflation cools in May but BoE focuses on threats from rising energy prices

British inflation rose by 3.4% y/y in May, compared to 3.5% in April, but missed forecast for 3.3% increase.

Core CPI, stripped for the most volatile food and components, was down to 3.5% in May, from 3.8% previous month and came in line with expectations.

BoE’s key inflation gauge, services price inflation, eased to 4.7% in May from 5.4% in April, and beat 4.8% consensus.

Food prices in the UK rose by 4.4% in the 12 months to May, marking the biggest increase in more than a year, while overall goods prices rose by 2%, in the biggest increase since November 2023 that was the big threat for low-income households.

Easing in consumer prices in May was in line with BoE’s expectations, but the central bank now faces threats from rising energy prices on escalation of conflict in the Middle East and needs to assess the situation and adjust policies accordingly.

The Bank of England’s MPC is going to announce its monetary policy decision on Thursday, with wide expectations of keeping interest rates on hold in its June policy meeting.

The British policymakers will face again strong and opposite forces as cooling inflation might be just a temporary, due to escalation in Israel-Iran conflict and surge in energy prices that would boost inflation expectations, though threats of stronger inflation pressures would be partially offset by signals of weakening UK labor market.

Apart from wide expectations to hold rates on Thursday, markets also bet for two 25-basis points rate cuts by the end of 2025, after the UK central bank lowered rates by a quarter point to 4.25% in the last policy meeting on May 8.