Markets Brace for an Inflation Surprise

UK inflation held steady at 2.8% in May, defying economist forecasts of a rise to 3%, as higher transport costs were offset by slowing food price increases, according to official figures released Wednesday.

The Office for National Statistics reported the consumer prices index remained unchanged from April's reading of 2.8% ^[1][2]. Economists had expected the rate to climb amid pressure from the Middle East conflict on energy prices.

Transport costs exerted the strongest upward pressure on inflation during the month. Air fares, vehicle taxes, and petrol prices all contributed to the increase ^[1][2]. These gains were counterbalanced by a slowdown in food price rises, with decreases recorded across meat, dairy, and vegetable items compared to the previous month ^[1][2].

The annual cost of raw materials continued to climb, driven primarily by rising chemical prices ^[1][2]. Meanwhile, the increase in the cost of goods leaving factories decelerated, partly due to a drop in the cost of domestically produced cars ^[1][2].

The 2.8% figure remains above the government's 2% target as Bank of England policymakers prepare to set interest rates on Thursday. They are widely expected to hold borrowing costs at 3.75% while assessing the economic impact of the Strait of Hormuz closure, which has driven up oil prices over the past three months ^[1][2].

Chancellor Rachel Reeves said the government was protecting families and businesses from rising costs through energy bill cuts and freezes on fuel duty and rail fares ^[1][2]. Economists hope a recent agreement between Donald Trump and the Iranian regime will reopen the maritime choke point in the coming weeks, potentially easing price pressures ^[1][2].