The UK's inflation rate rose less than expected in May, defying predictions of a sharper increase driven by the ongoing conflict in Iran. Official data released on Tuesday showed consumer prices rose by 3.2% year-on-year, down from 3.5% in April and below the 3.8% forecast by economists.
Market Reaction
The softer-than-expected reading provided some relief to financial markets, which had been bracing for a more pronounced spike. Sterling fell against the dollar and the euro, while gilt yields eased as traders trimmed bets on further interest rate hikes by the Bank of England.
Iran War Impact
The Iran war had been widely expected to push up energy and commodity prices, feeding through to higher inflation. However, the impact appears to have been more muted than feared, partly due to the government's decision to cap energy prices for households. Core inflation, which excludes volatile food and energy prices, also fell to 4.1% from 4.3% in April.
Bank of England Outlook
The data may give the Bank of England some breathing room after it raised rates to 5.5% earlier this month. Policymakers have been grappling with the dilemma of whether to prioritise fighting inflation or supporting an economy that is showing signs of weakness. The softer inflation reading could tip the balance towards a pause in the tightening cycle.
Economist Views
"This is a welcome surprise," said James Smith, an economist at ING. "The Iran war has not had the inflationary impact that many feared, at least not yet. But risks remain, and the Bank of England will be watching the data closely." Others cautioned that the reprieve may be temporary, with energy prices likely to rise further if the conflict escalates.
Consumer Impact
For households, the slower pace of price rises offers some respite after two years of above-target inflation. However, many are still struggling with higher costs for food, rent, and utilities. The government has faced criticism for not doing enough to help vulnerable families cope with the cost-of-living crisis.
