UK inflation stayed at 2.8% in May, undershooting forecasts that had expected a rise to 3%. The headline figure matched April's rate, even as transport costs — driven higher by airfares — added upward pressure.
Airfares push transport costs higher
Transport costs climbed in May, with airfares leading the charge. The increase wasn't enough to push the overall consumer price index past the 2.8% mark. Core inflation, which strips out volatile items like food and energy, has not been released yet but will be watched closely by the Bank of England as it weighs next moves on interest rates.
The steady reading gives the Bank some breathing room. Policymakers have been cautious about cutting rates too quickly, and a jump to 3% would have complicated that calculus. For now, inflation remains more than a full percentage point above the 2% target.
Fed rate hold odds at nearly 80%
Across the Atlantic, traders are betting the Federal Reserve will keep rates unchanged in July. Prediction market Polymarket puts the probability of a hold at 79.5% as of Wednesday. The Fed has signaled it needs more evidence that inflation is sustainably heading toward its 2% goal before easing.
The UK and US central banks face similar challenges: sticky inflation in services and a tight labor market. But their paths may diverge. The Bank of England could cut rates later this year if domestic price pressures ease further, while the Fed seems in no rush.
Investors will now parse upcoming UK data on wages and services inflation for clues. The next Bank of England rate decision is due in August. Across the pond, the Fed's July meeting will be the immediate focus for markets.
