UK inflation held steady at 3.4% in May, according to new figures from the Office for National Statistics.
The news prompted mixed reactions across the financial sector as analysts assess the likelihood of a summer interest rate cut.
May’s inflation rate matches the revised April figure, after the ONS corrected an earlier miscalculation caused by tax data errors.
The figure remains well above the Bank of England’s 2% target and has added to the uncertainty facing policymakers, particularly in light of geopolitical instability and persistent domestic cost pressures.
Dean Butler, managing director for retail direct at Standard Life, said: “Inflation is refusing to cool down. While many had hoped for a smoother path to interest rate cuts in 2025, it seems likely we’ll continue to see a cautious approach from the Bank, particularly given increasing global instability.”
Sarah Pennells, consumer finance expert at Royal London, added that although inflation has stopped rising, many people are still struggling.
“Prices may be rising more slowly, but they’re still rising. One in five adults still have less than £100 in savings, a figure unchanged for two years.”
Services inflation fell from 5.4% to 4.7%, aligning with Bank of England forecasts but still presenting challenges.
Patrick O’Donnell, chief investment strategist at Omnis Investments, noted: “This is a slightly bigger fall than expected and may shift some Monetary Policy Committee members towards the dovish end of the spectrum.”
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Despite the easing, most analysts agree that the Bank of England is unlikely to adjust interest rates when it meets this week.
Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management, said: “Today’s data will not change the Bank’s decision tomorrow. The tougher decision comes in August, as the Bank must weigh sticky inflation against signs of a cooling labour market.”
Rising tensions in the Middle East and surging oil prices continue to complicate the outlook.
Nicholas Hyett, Investment Manager at Wealth Club, warned that “a spike in oil would drive up prices across the board. Inflationary risk from the Middle East, combined with already rising prices, could change the calculus for the Bank of England”.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said that while the figures offer some reassurance, they won’t trigger any dramatic policy shifts.
“The ripples will barely touch the Bank of England as it deliberates the next move. The bond market may have more influence on savings and mortgages in the short term.”
Core inflation, which strips out volatile components like energy and food, fell to 3.5% from 3.8%.
David Morrison, senior market analyst at Trade Nation, described the reading as “broadly in line with expectations” and said it “reinforces expectations that the Bank of England could begin cutting interest rates as soon as August”.
However, Richard Carter, head of fixed interest research at Quilter Cheviot, noted that “while inflation has steadily declined from its double-digit peak, today’s data reinforces just how tricky the final stretch of disinflation can be”.
Lale Akoner, global market analyst at eToro, believes August could mark a critical juncture.
“Given the data uncertainty and global volatility, a June cut is unlikely. The Bank risks overtightening into stagnation unless inflation expectations fall further.”
Scott Gardner, investment strategist at Nutmeg, noted: “Getting services inflation down to a more manageable level is key to unlocking further cuts. A fall in the energy price cap, expected to save households £129 annually, may ease pressure in Q3.”
With inflation still far from target and geopolitical concerns looming large, the financial sector is preparing for a cautious and data-dependent path ahead.
As Butler from Standard Life pointed out, “Savers may continue to benefit from inflation-beating returns, but for mortgage holders and borrowers, the high-rate environment remains unwelcome. The economic heat isn’t cooling just yet.”