By Ed Frankl
U.K. inflation cooled a little in May but remained well above the Bank of England's target, with the rise in oil prices prompted by the conflict between Israel and Iran threatening to keep inflation higher for longer.
Consumer prices rose 3.4% in May compared with a year earlier, down from the 3.5% of April, the U.K.'s Office for National Statistics said Wednesday. That matched expectations from a consensus of economists polled by The Wall Street Journal.
The small decline in annual inflation in May is unlikely to move the dial for BOE rate setters, who are expected to leave their policy rate at 4.25% Thursday. Investors anticipate a quarter-point cut when the central bank next meets in August, according to LSEG data.
The BOE expects inflation to cool toward the end of the year, and reach its target in early 2027. But that could change if oil prices continue to rise, after an increase of around 8% since Israel's first strikes against Iran.
"Geopolitical uncertainty continues to carry with it inflationary concerns," said Joe Nellis economic adviser at accountancy firm MHA.
Price increases in energy commodities, this time from escalating tensions between Iran and Israel, continue to have a global inflationary effect that has implications for the U.K. economy, he noted.
The raising of a government-regulated energy-price cap and a big increase in water bills pushed inflation to its highest level since January 2024 in April. U.K. inflation remains at least a percentage point higher than in the U.S. and eurozone.
Investors had expected inflation to fall slightly in May, in part because April's published level of 3.5% was marginally higher than it should have been, due to an error in gauging the impact of some vehicle taxes that was only later flagged by the ONS.
Indeed, services inflation, long a worry as a link to spiraling wage growth, eased to 4.7% from 5.4%, partly as the labor market cooled. Core inflation, which strips out volatile energy and food costs, slid to 3.5% from 3.8%. However, both these remain well above target.
Food costs rose in May, but data showed a dramatic fall in air-travel costs that increased sharply in April due to the late Easter holiday period.
Energy prices fell in May, but that boost to the BOE's efforts to tame inflation seems set to reverse. Geopolitical uncertainty and its effect on oil prices have long been flagged by BOE officials as a potential concern.
"Significant uncertainty remains around the outlook for wholesale energy prices," the BOE's policymakers said last month.
Inflation fell in February and March, before the increase in regulated prices. Inflation surged in 2022 as energy prices rose sharply in the aftermath of Russia's full-scale invasion of Ukraine leading to a big fall in real incomes for most Britons, who will be anxious to avoid a repeat.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
06-18-25 0259ET
