UK inflation stays at 2.8% as transport costs offset food declines

U.K. consumer price inflation remained at 2.8% in May, official data showed Wednesday, undershooting economists’ expectations for a rise to 3% in a Reuters poll. The reading leaves price growth below the euro zone’s 3.2% May rate and the U.S. figure of 4.2%, while markets are positioned for the Bank of England to keep its benchmark rate unchanged this week.

The Office for National Statistics said transport made the largest upward contribution to inflation in May. That pressure was partly countered by lower prices for food and non-alcoholic drinks, which helped keep the headline rate level with April.

Air fares were a major driver within transport, rising 10.3% from April to May, according to the ONS. The statistics agency also cited higher motor fuel and sea fares as contributors. Analysts said the timing of the Easter holiday this year may have played a role in the increase in fares.

Fuel prices added to the transport effect. Average gasoline prices rose by 0.6 pence, or 0.8 U.S. cents, per liter between April and May, the ONS said. Over the comparable period a year earlier, average gasoline prices fell by 2.1 pence. Average prices reached their highest level since November 2022, when energy costs climbed after Russia’s full-scale invasion of Ukraine.

April’s fall in inflation to 2.8% had been attributed to a change in the U.K.’s regulated energy price cap. That cap is due to rise by 13% later this summer, when energy costs are set to reach a two-year high. The price cap affects household energy bills by limiting the unit rates and standing charges suppliers can apply to customers on default tariffs, so changes in the cap feed into measured consumer prices as bills reset.

The inflation data arrive before the Bank of England’s next monetary policy decision on Thursday. At its most recent meeting, the Monetary Policy Committee kept the key interest rate at 3.75%. Policymakers said then that “monetary policy cannot influence energy prices,” referring to the effect of the U.S.-Iran war, which has kept oil and gas prices elevated for months during the closure of the Strait of Hormuz.

LSEG data showed markets pricing a 95% probability that the central bank leaves rates at 3.75% at this week’s meeting, though traders still expect a rate increase by the end of the year. Interest rates work primarily through borrowing costs, demand and expectations; they do not directly lower global energy prices, which remain sensitive to supply disruptions and geopolitical developments.

Over the weekend, the U.S. and Iran announced a framework agreement aimed at ending their nearly four-month conflict. U.S. President Donald Trump and Iranian officials said the Strait of Hormuz would reopen after the agreement is signed in Geneva later this week.

Scott Gardner, investment strategist at J.P. Morgan Personal Investing, said in a note Wednesday that the data “will provide some hope that any rebound in U.K. inflation could be short-lived.” He added that observers would be watching how the Ofgem price cap affects inflation and household spending in coming months, and said the unchanged inflation reading could make a near-term Bank of England hold “more straightforward.”

This story draws on original reporting from CNBC.