UK inflation falls to 3.4%, complicating Bank of England’s interest rate task

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"UK Inflation Declines to 3.4%, Challenging Bank of England's Rate Decisions"

UK inflation falls to 3.4%, complicating Bank of England’s interest rate task analysis cover image The Guardian 8.7
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Original Article Source: https://www.theguardian.com/business/2025/jun/18/uk-inflation-falls-bank-of-england-interest-rates
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Inflation in the United Kingdom has decreased to 3.4% in May, down from 3.5% in April, according to the Office for National Statistics (ONS). This decline in the consumer prices index (CPI) was influenced by a significant drop in air fares and petrol prices, which helped to offset rising costs in food and furniture. The latest figures present a complex challenge for the Bank of England as it approaches its interest rate decision, with expectations leaning towards maintaining the current rate at 4.25%. The ONS also reported that core inflation, which excludes volatile items such as energy and food, has fallen from 3.8% to 3.5%, indicating a slight easing in underlying inflationary pressures. Despite the decline, the Bank's target remains at 2%, and there are concerns that the pace of interest rate cuts may not accelerate significantly in light of the recent CPI reduction, which was primarily driven by lower transport costs due to falling fuel prices.

In addition to the CPI data, there are broader economic concerns influencing the Bank of England's monetary policy decisions. Services inflation, which has been persistently high, has begun to decrease more rapidly, dropping from 5.4% to 4.7%. This shift comes amid indications of economic slowdown, with reports of falling wage growth and rising unemployment in recent months, alongside a contraction in the economy in April. An earlier error in the CPI calculation for April, attributed to the exaggeration of car tax effects, has also been acknowledged by the ONS, but this did not alter the official figure. Economic analysts, such as Monica George Michail from the National Institute of Economic and Social Research, predict that inflation will likely remain above 3% for the remainder of the year due to ongoing wage pressures and the impact of increased government spending. Additionally, geopolitical tensions, particularly in the Middle East, are contributing to economic uncertainty, leading many to expect that the Bank of England will keep interest rates steady during its upcoming meeting and potentially implement only one further cut in 2023.

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Source URL: https://www.theguardian.com/business/2025/jun/18/uk-inflation-falls-bank-of-england-interest-rates

Inflation in the UK eased to 3.4% last month after rises in the cost of food and furniture were offset by a steep fall in air fares and petrol prices.

May’s decline in the consumer prices index (CPI), down from the official figure of3.5% for April, complicates the Bank of England’s interest rates decision on Thursday, although policymakers are still almost certain to hold interest rates at 4.25%.

TheOffice for National Statistics(ONS) said its measure of core inflation, which excludes volatile items such as energy, food and alcohol, rose by 3.5% in the last year, down from 3.8%.

City economists had correctly predicted the fall in CPI in May to 3.4%. The Bank’s target is 2% and it is likely to remain circumspect about accelerating the pace of interest rate cuts after the reduction in May’s CPI, which was largely due to falls in the price of petrol and diesel, which brought down transport costs.

Services inflation, which has remained high over recent years, began to slow more rapidly, down from 5.4% to 4.7%. The Bank has resisted making steep cuts to interest rates while services inflation has remained sticky.

Pressure has increased on the central bank to cut the cost of borrowing, after recent data showed the economy has slowed. Wages growth fell andunemployment increasedin the February to April quarter, whilethe economy shrank in April.

The ONS said earlier this month that ithad overestimated its CPI reading for Aprilby about 0.1 percentage point because of an error that meant the effect of higher car tax bills was exaggerated. It left the original reading in place as the official figure for that month but said it would use the correctly weighted data in future calculations.

Monica George Michail, an associate economist at the National Institute of Economic and Social Research, said inflation was likely to remain above 3% for the rest of the year amidpersistent wage growth and the inflationary effects from higher government spending.

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“Additionally, the current tensions in the Middle East are causing greater economic uncertainty. We therefore expect theBank of Englandto keep rates on hold this Thursday and implement just one further cut this year,” she said.

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Source: The Guardian