Key events

1h ago Economists forecast UK inflation peak remaining under 4 percent
1h ago Japan Nikkei reaches fresh closing record
2h ago Introduction UK inflation stays at 2.8 percent with transport pressures balanced by easing food costs

Economists forecast UK inflation peak remaining under 4 percent

Analysts believe UK inflation will stay below 4 percent over the coming months.

James Smith developed markets economist at ING anticipates further interest rate reductions next year.

What stands out in the latest data is the remarkably subdued food inflation at present he noted.

This helps explain why headline CPI remained unexpectedly flat at 2.8 percent despite upward influences from air fares and a technical adjustment in road tax. Food prices declined in May compared with April mirroring patterns observed in the eurozone and Eastern Europe. Recent producer price information indicates food inflation may continue dropping sharply in the next couple of months. While this situation will evolve the energy price effects are not expected to fully influence food costs until early next year.
Overall it remains too soon to observe significant broader effects from the Middle East situation beyond fuel prices. Services inflation fluctuates partly due to Easter timing this year yet the Bank of England preferred core services measure excluding volatile items has held steady just under 4 percent. The BoE Decision Maker Panel of CFOs suggests services inflation will linger near current levels through the summer.
We remain doubtful that the Middle East developments will produce the extensive second round effects policymakers worry about. Data from twelve months ago when National Insurance and minimum wage increases had limited inflation impact points to weaker corporate pricing power than during the prior energy shock.
The same applies to worker negotiating strength. Wage growth has proven notably soft in recent months.
All indicators point to inflation likely staying below 4 percent a critical threshold for the BoE. The central bank highlighted last summer that second round effects become more probable above that mark. A 13 percent rise in household energy bills this July should push inflation near 3.5 percent by September but current futures suggest a 7 percent drop in bills from October onward.
Absent major setbacks such as oil prices exceeding 100 dollars a barrel we anticipate the Bank of England will maintain its pause. We project a 7 to 2 vote for no change tomorrow. Rate reductions are expected to resume in 2027.

Japan Nikkei achieves new closing record

Japan Nikkei which crossed the 70000 point threshold for the first time earlier this week closed at a fresh high of 69902.25 gaining 0.7 percent from Tuesday record of 69404.5.

The Straits Times index in Singapore advanced 1.3 percent while China CSI 300 rose 0.8 percent and Hong Kong Hang Seng declined 0.8 percent.

In London the FTSE 100 index gained roughly 7 points to 10502 with other European markets showing minimal movement.

In bond markets the yield on the 10 year UK government gilt fell nearly four basis points to 4.75 percent marking the lowest level in a month.

Financial markets assign just a 2.6 percent probability to an interest rate increase from the Bank of England tomorrow as economists and traders expect policymakers to hold steady while reviewing inflation data and developments around the Iran situation.

Markets also anticipate no change in July with September hike odds near even. A November move retains 61.6 percent probability.

Rob Wood chief economist at Pantheon Macroeconomics commented

The inflation release supports the monetary policy committee likely decision to keep Bank Rate unchanged this week and reduces July hike prospects. Although additional data releases will arrive before July the decline in oil prices following the extended ceasefire has already prompted removal of our hike forecast. We now project Bank Rate on hold through end of 2027.
Looking forward inflation should accelerate in coming months as supply pressures affect goods and energy contributions rise. Underlying services inflation excluding volatile and government set prices remained above target consistent levels in May and eased only gradually.
Motor fuel prices are now expected to add around 20 basis points less to inflation than previously anticipated and survey measures of services inflation should moderate as firms gain room to absorb costs. Nevertheless some inflation momentum is already embedded. We anticipate a peak of 3.4 percent in November revised down from 3.6 percent.

Suren Thiru chief economist at the Institute of Chartered Accountants in England and Wales stated

Although inflation remained unchanged in May helped by lower food costs these results have been overshadowed by renewed optimism following the US Iran peace agreement.
Rising services inflation may heighten Bank of England concerns about wider price pressures from the conflict yet a softening labour market should limit second round effects.
While the peace deal came too late to prevent a summer spike from energy and food costs a peak well below 4 percent now appears increasingly likely if oil prices keep falling.
Even with reduced hostilities the UK faces lingering effects as energy and supply chains require months to stabilise delaying meaningful inflation relief until late 2026.
May data softer than expected makes a rate hold on Thursday highly probable especially as the agreement raises hopes inflation may ease without further tightening.

Despite food inflation easing to 2.2 percent last month the lowest since December 2024 Karen Betts chief executive of the Food and Drink Federation cautioned that food inflation could still rise later this year.

While easing food inflation in May is welcome consumer prices have yet to reflect costs from the Strait of Hormuz closure. It typically takes several months for higher input costs to reach retail prices due to long term contracts. Manufacturer costs for transport packaging and energy are increasing and food inflation is expected to pick up through this year and into next.
Uncertainty has become standard for producers raising overall costs. Government support through energy prioritisation and regulatory streamlining remains important to enable long term investment.

Prices rose fastest for beef and veal at 9.4 percent offal at 9.2 percent preserved fruit at 9.0 percent and confectionery at 8.8 percent.

Prices declined in 15 categories with largest drops in flours down 6.1 percent olive oil down 4.2 percent and jams down 3.0 percent.

Transport costs rose at an annual rate of 6.8 percent up from 4.5 percent in April reaching the highest level since December 2022.

Main drivers included air fares motor fuels sea fares and correction of a prior Vehicle Excise Duty error.

Air fares increased 10.3 percent from April to May versus a 5 percent drop a year earlier due to differing holiday timing with European routes particularly affected.

Sea fares rose 3.4 percent compared with a 10.2 percent fall last year also influenced by holiday schedules.

Average petrol prices increased 0.6p per litre versus a 2.1p drop last year reaching 157.4p the highest since November 2022.

Meat especially beef and cooked ham dairy particularly cheese vegetables and fish became cheaper while oils and fats increased.

Grant Fitner chief economist at the ONS remarked

Inflation remained steady in May as opposing price movements balanced out. Upward pressure stemmed mainly from transport including air fares vehicle taxes and petrol.
These were countered by lower food prices with reduced inflation across meat dairy and vegetable items plus domestic heating oil costs which declined after recent rises.
Raw material costs continued rising led by chemicals while factory gate goods inflation slowed partly due to lower domestic car prices.

Chancellor Rachel Reeves commented

While Middle East tensions push global prices higher our economic approach has kept inflation steady.
We continue protecting families and businesses via energy bill reductions fuel duty freezes and rail fare stability. This plan supports a stronger Britain.

Introduction UK inflation stays at 2.8 percent with transport costs offset by slower food price rises

Good morning and welcome to our rolling coverage of business financial markets and the global economy.

Today brings UK inflation figures. The annual rate held unexpectedly at 2.8 percent last month as Iran related impacts proved milder than anticipated.

Data released by the Office for National Statistics showed economists had forecast a rise to 3 percent. Last month the rate eased to 2.8 percent following lower energy bills from the recent budget.

Higher transport prices from air fares fuel and sea travel were balanced by slower food price growth.

Food prices rose 2.2 percent over the year to May down from 3 percent in April marking the lowest rate since December 2024.

Core inflation excluding energy food alcohol and tobacco edged up to 2.6 percent from 2.5 percent.

Services inflation closely monitored by the Bank of England increased to 3.7 percent from 3.2 percent.

Inflation stays above the 2 percent target yet rates are expected to remain on hold Thursday as policymakers assess ongoing developments.

Economists hope the recent US Iran agreement will support reopening of the Strait of Hormuz which had lifted oil prices since late February affecting many goods.

Oil prices continued declining currently down 0.7 percent to 78.40 dollars per barrel for Brent with West Texas Intermediate off 0.8 percent at 75.41 dollars.

Asian markets traded mostly higher and Japan Nikkei hit another record despite policy tightening this week advancing 0.76 percent to 69943 after briefly exceeding 70000.