The forecasts came fast and ugly in the days after Iran closed the Strait of Hormuz in early March. City economists pencilled in inflation racing back toward double figures. Investors, at one anxious point, were betting on three quarter-point rate rises from the Bank of England before the year was out, a near-total reversal of the cuts they had been counting on weeks earlier. Three months on, none of that has happened. UK inflation held at 2.8% in May, the Office for National Statistics confirmed on Wednesday, unchanged from the previous month and below the 3% most analysts had expected.
The steadiness is the story. Petrol prices have been brutal: motor fuel cost 25% more in May than a year earlier, a figure the ONS itself flagged. Yet that pain has stayed largely bottled up at the pumps without seeping across the wider economy, and that is the part that surprised the people paid to predict these things. Food prices, the thing shoppers actually notice week to week, slipped 0.1% on the month. Slower grocery costs effectively cancelled out the rising cost of getting around.
Why the Iran war hit landed softer than feared
The comparison everyone in the trade reaches for is 2022. When Russia invaded Ukraine, oil and gas spiked at a moment when British households were still flush with pandemic savings and willing to spend. Inflation tore through the economy and peaked at 11.1% that November. This time the backdrop is different. Andrew Bailey, the Bank of England governor, has made the point repeatedly that firms simply lack the room to push prices higher, because cash-strapped customers will not accept it. Demand is thin. That changes everything about how an energy shock travels.
Andrew Wishart of Berenberg put it plainly after the data dropped, noting the downside surprise came from "lower food and goods prices than we expected" and that companies could not pass their higher energy bills along. That is a polite way of saying the British consumer is tapped out, which is grim on its own terms but, perversely, helpful for the inflation numbers.
The UK is not an outlier here. Its inflation path has roughly tracked the European Union's, even though several EU members (Germany among them) cut fuel taxes to soften the blow. Britain leaned instead on its energy price cap to blunt the worst of the fuel increases. The mechanisms differed; the outcome converged.
Not everyone is ready to call the all-clear. Economists have trimmed their forecasts for the months ahead and grown more doubtful about future rate rises, but several caveats remain live. Fertiliser is the one worth watching. The Strait of Hormuz is a key transit route for the stuff, and Gulf output feeds into it, so higher fertiliser costs were always expected to filter through over many months rather than weeks. That bill may still arrive at the supermarket eventually. Ministers, for their part, have reportedly been weighing whether to shelve a carbon tax on fertiliser to keep food prices in check, a sign Whitehall is not entirely relaxed.
The Bank of England's narrowing problem
The Bank's monetary policy committee meets Thursday, and the consensus was already overwhelming before Wednesday's figures: rates stay parked at 3.75%. That has not changed. What has shifted is the conversation about what comes next. Inflation at 2.8% is still comfortably above the Bank's 2% target, so most analysts still expect at least one rise this year. But the betting has slid. Markets now think any move is likelier in November than September, the urgency draining away with each benign reading.
The bigger relief came from the oil market itself. The announcement this week of a US-Iran peace deal, and the prospect of Hormuz reopening, has already dragged crude below $80 a barrel. That single move erases the Bank's worst-case scenario, the one where energy costs kept climbing and forced its hand. With that threat receding, attention is starting to drift the other way entirely. A weakening jobs market is now the thing keeping some MPC members up at night, and if that deteriorates further, the next move from Threadneedle Street could plausibly be a cut, not a hike. That would have sounded absurd in March. It does not now.
There is a reading of all this that should trouble policymakers more than the headline soothes them. Low inflation born of consumers who cannot afford to spend is not a sign of health. It is a symptom of an economy running on fumes, and a central bank that ends up cutting rates into a slump is fighting a very different fire than the one it spent the spring preparing for.
Washington's harder line
The contrast across the Atlantic is stark, and instructive. The US ran into the same Iran shock and the same Hormuz disruption, but its inflation did not hold steady. It surged to 4.2% in May, a three-year high, with the Bureau of Labor Statistics pinning much of the blame on the energy spike that followed the American strikes on Iran. President Donald Trump, who ordered those strikes, has been almost gleeful about the consequences, telling reporters in June, "I love the inflation."
The Federal Reserve has been considerably less sanguine. At Kevin Warsh's first meeting in charge, the Fed held rates steady between 3.5% and 3.75%, defying Trump's well-documented demand for cuts. Warsh's predecessor, Jerome Powell, had been hounded by the president to ease policy, and Trump made no secret of expecting the new chair to deliver. He did not. The Federal Open Market Committee voted unanimously to hold, and the closely watched dot-plot told the real tale: nine of the eighteen participants now expect a rate rise this year, against just one forecasting a cut. Warsh, who dislikes the dot-plot exercise and did not submit his own projection, nonetheless urged colleagues to publish theirs.
That split between the two central banks comes down to pricing power, the same dynamic Bailey keeps citing. American firms could pass costs along. British ones could not. Same war, same closed strait, two very different inflation stories.
For British households, the figure that matters is still the one at the pump, and 25% year-on-year fuel inflation does not feel benign to anyone filling a tank. The reopening of Hormuz should ease that over the coming weeks if the peace deal holds, which is the open question hanging over all of it. The Guardian's Heather Stewart noted the softer-than-feared impact on the cost of living, and that read looks right for now. What is worth watching is whether the fertiliser costs still working their way through the supply chain, and a jobs market that is already wobbling, hand the Bank a fresh set of problems just as the energy scare fades. The committee dodged one crisis. The next one may already be forming behind it.