UK inflation remained unchanged at 2.8% in May, defying expectations of a rise to 3%, according to data reported by the Guardian. The reading is the latest in a series of economic figures that have come in better than forecast since Iran disrupted oil supplies through the strait of Hormuz at the start of March.
Fuel costs surge but fail to spread more widely
The cost of motor fuels in May was up 25% on a year ago, according to figures from the Office for National Statistics (ONS). Despite that sharp increase, the wider inflationary impact has so far been more contained than many analysts initially feared. Food prices, which the Guardian notes shoppers tend to watch closely, were actually down 0.1% month on month in May.
Andrew Wishart of Berenberg bank commented in response to the data: "The downside surprise was due to lower food and goods prices than we expected, suggesting that firms lack the pricing power necessary to pass on the increase in their energy costs."
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Rate rise expectations scaled back
When Iran closed off oil supplies in early March, investors were at one point expecting as many as three quarter-point interest rate rises before the end of the year, a sharp shift from earlier forecasts of cuts, according to the Guardian. Following the more benign inflation readings, economists have downgraded their UK inflation forecasts and cast doubt on the likelihood of multiple rate increases.
The Bank of England's monetary policy committee was widely expected to hold interest rates at 3.75% at its Thursday meeting, and analysts say that remains the case. Most still anticipate at least one rate rise this year, though markets are now pricing that increase in November rather than September.
Bank of England governor flags lack of pricing power
The Guardian reports that Bank of England governor Andrew Bailey has remarked that firms appear to lack "pricing power", meaning companies do not believe cash-strapped shoppers would tolerate higher prices. This, the Guardian notes, contrasts with conditions in 2022, when Russia's invasion of Ukraine drove oil and gas prices higher during a period of strong consumer demand, pushing UK inflation to a peak of 11.1% in November of that year.
Risks remain, peace deal shifts oil prices
Analysts caution that risks have not disappeared entirely. The Guardian highlights that the impact of higher fertiliser prices, for which the strait of Hormuz is an important transit route, was always expected to feed through over many months. US inflation, meanwhile, surged to 4.2% in May, a three-year high, illustrating that the UK's experience has diverged from that of the United States.
However, the announcement of a US-Iran peace deal this week has already pushed oil prices to below $80 a barrel, according to the Guardian, removing what had been the Bank of England's worst-case scenario. With price pressures potentially easing, the Guardian notes that the monetary policy committee may shift its focus towards a weakening jobs market, and that the next interest rate move could yet be a cut rather than a rise.
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