Surprisingly benign UK inflation data signals a softer Iran war hit than feared

As soon as Iran choked off oil supplies through the strait of Hormuz at the start of March, there were dire warnings about rocketing UK inflation and the drastic action the Bank of England might take to rein it in.

At one point, investors were expecting as many as three quarter-point rises in interest rates before the end of the year – a sharp turnaround from earlier forecasts of rate cuts.

Yet since then a series of economic readings have come in better than forecast. Wednesday’s news that inflation was steady at 2.8% last month, is the latest evidence raising hopes that the real-world impact of the Middle East war on the cost of living could be more muted than first feared.

Three months on from the start of the conflict, inflation remains well above the Bank’s 2% target, and consumers have certainly endured rapid increases in the price of petrol. The cost of motor fuels in May was up an eyewatering 25% on a year ago, the Office for National Statistics (ONS) said.

But May’s inflation reading was unexpectedly benign – unchanged when economists expected a rise to 3% – and came after inflation fell by more than forecast in April.

That suggests fuel price rises have so far failed to spill out more widely across the economy; indeed, food prices, which shoppers tend to watch closely, were actually down 0.1% month on month.

The UK’s path of inflation has mirrored that of the European Union, despite some EU countries, including Germany, implementing fuel tax cuts to cushion the impact of price rises. US inflation surged to a three-year high of 4.2% in May – a record Trump shrugged off by insisting: “I love the inflation.”

Economists responded to the weaker-than-expected reading by downgrading their UK inflation forecasts for the coming months – and casting doubt on the prospect of future rate rises.

Bank of England Governor Andrew Bailey suggest firms lack ‘pricing power’ to drive up inflation; in that they don’t think cash-strapped shoppers would tolerate higher prices Photograph: Hannah McKay/Reuters

There may yet be worse to come: the impact of the higher price of fertiliser, for which the strait of Hormuz is an important transit route, and which relies on outputs from the Gulf, was always expected to play out over many months, for example.