UK inflation remained steady at 2.8% in May, slightly below economists' expectations of a rise to 3%, according to official data released by the Office for National Statistics. This figure matches the inflation rate recorded in April, which had previously dropped due to a temporary adjustment in the country's regulated energy price cap. Despite the rate holding steady, the upcoming 13% increase in the energy price cap this summer is expected to push energy costs to their highest level in two years.

Transport costs were the main driver of inflation in May, with a significant 10.3% month-on-month surge in air fares, as well as increases in motor fuel and sea fares. The timing of the Easter holiday was cited as a factor contributing to higher airfares. Gasoline prices also climbed to their highest average since November 2022, reflecting ongoing volatility linked to geopolitical tensions in the Middle East, notably the U.S.-Iran conflict that has disrupted oil and gas markets.

The Bank of England’s Monetary Policy Committee decided to maintain interest rates at 3.75% during its previous meeting, emphasizing that energy prices remain beyond the influence of monetary policy. Market expectations strongly favor the central bank keeping rates steady in their upcoming June meeting, although traders anticipate potential rate hikes later in the year if inflation pressures persist. The continuation of elevated energy prices and geopolitical uncertainty complicates the outlook for inflation management.

Scott Gardner, an investment strategist at J.P. Morgan Personal Investing, suggested the stable inflation data may indicate any future uptick in UK inflation could be brief. The recent announcement of a framework deal ending the U.S.-Iran conflict and the reopening of the Strait of Hormuz might ease some energy supply pressures. Nonetheless, policymakers are expected to adopt a cautious “wait and see” approach, monitoring how rising energy costs and the Ofgem price cap adjustments impact inflation and household spending in the coming months.