UK inflation unexpectedly remains unchanged at 2.8% in May

UK annual inflation unexpectedly held steady in May, suggesting price pressures were weaker than expected even before a US-backed deal to end the Iran war triggered a sharp fall in energy prices.

Consumer prices rose 2.8% year-on-year in May, unchanged from April, the Office for National Statistics (ONS) said on Wednesday.

The reading came below economists’ expectations of a 3% annual increase.

The ONS said food and non-alcoholic drinks helped restrain inflation, while services inflation, a closely watched gauge of domestic price pressures, increased to 3.7%.

The figures come as the Bank of England (BoE) is due to announce its latest interest rate decision on Thursday.

Markets expect the central bank to keep rates unchanged at 3.75%, with policymakers weighing a weakening labor market against inflation that remains above the bank’s 2% target.

The latest data may support the cautious “wait-and-see” approach favored by some BoE rate-setters, as price pressures have not accelerated as much as feared.

The outlook has also shifted after a US deal to end the Middle East conflict and reopen the Strait of Hormuz sent energy prices lower, raising hopes that inflationary risks from the war can be contained.

However, upward pressure on UK inflation is still expected from household energy bills, as the country’s regulated energy price cap is set to rise in July.

Despite the softer-than-expected May reading, policymakers remain concerned that elevated inflation could influence wage demands and business pricing, as the Bank of England seeks to balance weak growth and labor market softness against the risk of above-target inflation becoming more persistent.