The annual rate of increase in UK consumer prices has fallen slightly to 3.4% but remains above the Bank of England’s target of 2%. Data corrections and measurement quirks dominate this month’s marginal decline. Looking ahead, oil price volatility poses the main upside risk to the inflation outlook.
UK inflation has edged down marginally to 3.4% in the year to May 2025. The consumer price index (CPI) fell 0.1 percentage points from the previous month. Following last month's surge, a quick return to the Bank of England's 1-3% target range is unlikely, but so is runaway inflation. Internationally, oil price movements following an escalation of the Iran-Israel conflict are introducing some volatility.
Figure 1. Annual inflation, UK and G7
Source: National statistics agencies, Economics Observatory analysis.
UK inflation remains the second highest among the G7 countries. It trails Japan (3.6%), but stays ahead of the United States (2.3%), Germany (2.1%), Italy (1.9%), Canada (1.7%) and France (0.8%).
What’s driving the UK’s comparatively high inflation?
In April, annual inflation surged by 0.9 percentage points to 3.5%. The sharp rise was driven primarily by regulated utility price increases at the start of the financial year. Energy bills rose 6.4% when Ofgem increased the price cap, water bills jumped 26% and council tax increased by 5% in nine out of ten areas. The level effect from these increases means that year-on-year inflation comparisons will remain elevated for some time.
May’s data reveal more subdued price movements. The largest movements were minor, and broadly reflective of measurement quirks rather than genuine economic trends. For example, in April, data collection unusually coincided with the Easter holidays. This meant that seasonal sales depressed some retail prices, while airfares shot up 27.5% due to inconsistent year-on-year comparisons.
Scheduling issues were avoided this month, moderating inflation figures for both categories. Airfare inflation turned negative at -3.9%, while clothing prices dipped slightly to -0.3%.
Offsetting the large adjustments elsewhere was high food and drink inflation. Prices in this category accelerated for the third consecutive month, reaching 4.4%, the highest rate since February 2024. Notably, the price of chocolate surged by 17.7% in the year to May, the steepest annual rise since records began in 2016, driven by poor harvests in key cocoa-producing regions.
A statistical correction also influenced the latest figures. Mistakes in vehicle excise statistics meant that inflation last month was overstated by 0.1 percentage points. The incorporation of the correct data reversed this.
Figure 2. Contributors to the 0.1 percentage point fall in inflation, by sector
Source: Office for National Statistics (ONS).
Is this the start of a new normal of higher inflation?
Last month's sharp rise in inflation was largely anticipated by economists and policy-makers. But back-to-back months of higher inflation could spark fears of a return to persistently higher inflation and delays to interest rate cuts, as in the post-pandemic period when inflation peaked at 9.6% and the Bank of England hiked rates 14 times.
Nothing in the data points to a scenario of runaway inflation. The Bank had anticipated much of the recent increase, projecting CPI inflation to reach 3.5%. Yesterday, its monetary policy committee (MPC) voted 6–3 to maintain interest rates at 4.25%.
While the MPC expects annual inflation to fall as April’s sharp, regulation-driven jump fades from year-on-year comparisons, it emphasised that this alone won’t be enough. To ensure that inflation reaches its 2% target, more ‘pronounced disinflation’
will be needed, the MPC minutes note.
Trade uncertainty, which threatened to throw inflation off course, has also eased somewhat. The Trade Policy Uncertainty Index has fallen for the first time this year. Progress with the United States includes a deal signed at the recent G7 summit covering the aerospace and automotive sectors. President Trump also signalled UK protection against future tariffs ‘because I like them’.
Nonetheless, trade tensions weighed on the Bank’s decision yesterday. While acknowledging that the direct economic hit from recent trade developments may be smaller than previously feared, the Bank emphasised remaining uncertainty. Further tariff changes could still contribute to new price pressures.
Oil price volatility now poses the main forward-looking risk. Oil prices surged over 7% following Israel’s attacks on Iranian facilities and subsequent retaliation by Iran. The price of West Texas Intermediate crude oil reached $72.98 per barrel while Brent hit $74.23.
Since 2018, when the United States withdrew from the Iran nuclear deal, Iranian oil has been largely cut off from Western markets. This means that UK prices are largely insulated from changes in Iranian production. The bigger challenge comes from potential disruption to surrounding areas, particularly the Strait of Hormuz, a critical route for global oil trade through which 20% of global supply flows.
Crude oil, as a commodity, does not feature directly in the CPI basket. But its importance as a production input means that sustained increases could translate into higher inflation.
How long will UK inflation stay elevated?
Inflation remains elevated, but it is unlikely to spiral out of control. The UK appears to be on track for a gradual decline in inflation, with the Bank of England projecting CPI inflation to peak at 3.7% by September before easing to 2.4% by the middle of next year – but as the Bank signals, the path will be ‘bumpy’.
On Wednesday this week, Jerome Powell, chair of US central bank the Federal Reserve, struck a similar note of caution. Following the Fed’s decision to leave US interest rates unchanged, he warned that the inflationary impact of recently imposed tariffs would be ‘very hard to predict’.
While risks from trade have declined, the trend could still be upset by oil price volatility. The Iran-Israel conflict has injected fresh uncertainty that could push energy costs higher if the conflict spreads or critical routes are blocked.
Whatever happens, the regulated nature of last month's bill rises means that UK inflation rates will stay high for some time. Energy, water and council tax increases persist until regulators adjust them again, creating a sustained uplift in the annual inflation rate that will continue to feed through for months ahead.
The path back to target remains intact, but it is far from assured. As the Bank of England and the Fed make clear, geopolitics and global supply shocks could easily knock inflation off course.
Where can I find out more?
Read more about the path of inflation and how it is calculated:
- The Bank of England’s monetary policy committee minutes motivate yesterday’s decision, while last month’s monetary policy report sets out its forecasts for inflation and other key economic metrics.
- The Office for Budget Responsibility (OBR) produces its own forecasts for a range of inflation measures. Read about its methodology and the influence of government policy.
- Some investors are now relying on alternative measures, following ONS issues, Financial Times.
Find out more about inflation from the Economics Observatory:
- Why has UK inflation risen? Last month, Finn McEvoy investigated the sources of April’s surge.
- What are the links between job vacancies, unemployment and inflation? Read Fergus Jimenez-England on the links between the labour market and inflation, and the puzzle of why unemployment has remained historically low despite rising interest rates.
- What are the future prospects for UK inflation? In June 2024, Huw Dixon explored what falling inflation means for the future amid domestic and global risks.
- Can artificial intelligence help us to measure inflation? Economics Observatory research into how AI tools can improve the speed, cost, and breadth of inflation measurement.
