Inflation in May slowed slightly to 3.4%, down by 10 basis points from April’s official figure of 3.5%, but expectations of a spike in the second half of the year remain.
The downward pressure on inflation in May largely came from slowing price growth on transportation, according to the Office for National Statistics. Transport costs increased by 3.3% in the year to April, but only grew by 0.7% in the year to May.
This slowdown was offset by an increase in the price of furniture and household goods, which fell 0.5% in the year to April, but rose 0.8% in the year to May.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Get 6 issues free
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
While the ONS’s official records say that inflation was 3.5% in April, erroneous car tax data from the Department for Transport meant that they misreported inflation, with the true April figure being 3.4%. In line with the ONS’s revisions policy, the official statistics for April have not been amended.
Though falling inflation is good news in the short term, most forecasts do not think we are out of the woods quite yet.
As the year progresses, the headline figure of inflation (as measured by the Consumer Prices Index) is expected to swell in the third quarter of 2025, according to most forecasts.
The Bank of England expects that inflation will grow slightly to 3.5% in Q3 2025, according to forecasts published in their May Monetary Policy Report.
They reiterated this expectation when the central bank’s Monetary Policy Committee (MPC) met in June to decide interest rates, saying inflation “is expected to remain broadly at current rates throughout the remainder of the year before falling back towards target next year”.
While 3.5% inflation is still well above the 2% target, the central bank’s inflation outlook looks a bit more promising now than it did at the start of the year, when the MPC expected prices to reach as high as 3.75% in 2025.
The reason the Bank of England thinks inflation will rise in the next few months is because of a number of factors, including increased geopolitical tensions, global uncertainty, Trump’s tariff regime, and worries about the price of energy.
When the MPC met to decide interest rates on 18 June, conflict between Israel, Iran, and later the United States prompted fears that energy prices could soar if the global oil supply was impacted, leading to an increase in inflation.
However, in the weeks since the meeting, tensions in the Middle East have somewhat simmered, but worries remain over whether energy prices could rise if more conflict emerges.
When will inflation go down?
Though the outlook for inflation in the third quarter of 2025 may cause some dismay, the good news is that most forecasters do not expect inflation to remain at high levels for too much longer.
The Office for Budget Responsibility (OBR), the UK’s official fiscal watchdog, estimates that inflation will reach its peak in the third quarter of 2025, before having a sustained fall back down to the Bank of England’s 2% target in 2026.
Their model, last updated on 21 May 2025, expects inflation to remain high in the fourth quarter of 2025 at 3.1%, before tumbling down to 2.6% in the first quarter of 2026, and 2% in the second.
Similarly, the Bank of England’s predictions also foresee a fall in inflation, albeit a less dramatic one that the OBR.
They expect inflation to fall to 3.3% in the fourth quarter of 2025, before falling again to 2.7% in the first quarter of 2026. After this, the bank expects inflation to keep slowly easing back down to 2% in the first quarter of 2027.
If inflation is set to rise, why is the Bank of England lowering interest rates?
Inflation rising above the 2% target is always a cause for concern for economists, policymakers, and consumers.
Policymakers at the Bank of England are particularly concerned about inflation figures as it is the one of the jobs of monetary policy to guide and control inflation so that prices do not spiral out of control. This is largely done through influencing interest rates – they are typically raised to fight inflation.
Despite inflation being forecast to remain high this year, the Bank of England has been gradually cutting rates since the summer of 2024.
The Bank of England says their approach is “gradual and careful”, emphasising that the MPC is alive to concerns about the inflationary effects of rate cuts.
However, while rate cuts were easier to justify in the first half of 2025 thanks to lower inflation figures, as the year progresses it could become increasingly hard to justify rate cuts if inflation moves to the upside of current estimates.
The reason for the central bank’s more dovish approach to rate cuts in a high inflation environment reflects concerns about the health of the UK economy.
In 2025, GDP growth has remained slow, with the economy contracting by 0.3% in April, though earlier months were a little more promising.
One way to help support the economy is by lowering interest rates as people are more incentivised to spend their money rather than save it, prompting more economic activity. The downside of this is that more economic activity leads to higher inflation.
With anaemic economic growth, the Bank of England will be under pressure to lower interest rates in order to try to keep the economy healthy, perhaps illustrating that slow growth is more of a worry for the UK economy than keeping inflation down.
Review: Eden Roc Cap Cana – fun, sun and golf in the Caribbean
Reeves delays cash ISA reform, but savers are not out of the woods yet
