Inflation holds at 2.8% in May – industry reaction

Latest figures from the Office for National Statistics (ONS) have shown that inflation remained steady in May, with consumer prices rising 2.8% year-on-year, unchanged from April and below economists’ forecasts of 3%.

The ONS says lower food inflation, including meat and dairy products, helped offset upward pressure from air fares, vehicle taxes and petrol. Services inflation, rose to 3.7%, slightly stronger than expected.

Commenting on the lastest inflation figures for May, ONS Chief Economist Grant Fitzner said “After last month’s slowdown, inflation held steady in May as various price movements offset each other. The main upward movement came from transport , with airfares, vehicle taxes and petrol prices all pushing up inflation.

“These were offset by lower food prices, with decreases in inflation seen across a range of meat, dairy and vegetable items compared to last month, as well as the cost of domestic heating oil, which fell back after climbing in recent months.

“The annual cost of raw materials continued to increase, led by rises in the cost of chemicals, while the increase in the costs of goods leaving factories slowed, partly due to a drop in the cost of domestically produced cars.”

Neil Rudge, Chief Banking Officer at Shawbrook, said “Today’s figures will be welcome news for businesses, with inflation remaining stable despite ongoing pressures across the economy. Many SMEs are still feeling the impact of higher costs, so any sign of things stabilising is good news. Businesses will also be keeping a close eye on developments on the world stage – and there’s real hope that some of the recent progress we’ve seen could help stabilise energy prices and supply chains, and take some of the pressure off interest rates.

“Attention will now turn to the Bank of England’s decision tomorrow. While businesses will be hoping this strengthens the case for lower interest rates over time, they’ll ultimately be looking for greater certainty to support investment and growth.”

Mike Randall, CEO at Simply Asset Finance said “Headline inflation holding steady should provide some reassurance to UK SMEs after a prolonged period of cost pressures. For firms at the coalface, the fact that inflation has not accelerated further helps relieve some of the uncertainty around already stretched margins, making it easier to keep projects moving and plan for growth with greater confidence.

“Many businesses have likely spent recent years absorbing rising costs rather than passing them on to customers, often forcing them to dip into reserves or scale back investment plans. While these figures are encouraging, businesses still need a stable environment that gives them the confidence to invest. The UK is full of ambitious entrepreneurs with the potential to drive investment and growth. Unless the government acts to provide greater certainty, we risk dampening those ambitions and prolonging the cycle of caution that has held many businesses back in recent years.”

Anna Leach, Chief Economist at the Institute of Directors, said “Inflation has once again come in lower than expected in May, as rising fuel inflation was offset by lower rates in other categories, like food, clothing and recreation and culture. Some recent policy measures will also help push down on inflationary pressures for households in the coming months, including temporary VAT reductions on leisure activities and the extension of the fuel duty freeze.

“Today’s steady inflation rate should be more than enough for the Bank of England to keep rates on hold this month. But even a swift end to the Iran conflict will leave global energy supplies disrupted and prices elevated for a considerable period, driving inflation towards 4% by the end of the year. To minimise the risk that inflation becomes embedded, government needs to think more deeply about the drivers of price increases. Rising energy, tax and employment costs affecting businesses need addressing if broader inflationary pressures are to be minimised.”

John Phillips, CEO of Just Mortgages and Spicerhaart, said “Inflation data springs yet another surprise, remaining stable with lower food prices doing the heavy lifting to defy widespread expectations of an increase. This however is hugely welcome news – particularly ahead of the MPC decision tomorrow.

“Ahead of that decision, we do have news of supposed US-Iran peace deal which is ready to be signed. While reports suggest it has more holes than a chocolate teapot, it is the positive progress that markets and economists have been waiting to see. In truth, oil prices have already reacted positively. While it may not be a magic cure for inflation, it does give rate setters the scope to be more measured in their approach to monetary policy moving forward. Even with this surprise from inflation, a hold is still the most likely outcome tomorrow. But this improving picture will hopefully alleviate any need for the multiple hikes as had been previously feared.

“As swap rates continue to stabilise and react favourably to this news, we absolutely need to be shouting about this to our clients. We have already been seeing movements from lenders across the market, proving that there is plenty of money out there and lenders ready and willing to lend. It’s up to us to be proactive, to really engage with our customer base and give them the guidance they need to navigate a changing market.”