Inflation held firm and below forecasts at 2.8% in May, the latest consumer price index (CPI) data from the Office for National Statistics shows.
Market expectations that the Bank of England will raise rates at its meeting tomorrow are now close to zero, according to LSEG.
About 30% of participants predict no increase in rates next year.
Food inflation was 2.2% over 12 months – the lowest level in a year and a half.
The upward pressure came from air fares and fuel costs.
AJ Bell head of financial research Danni Hewson says: “It would be a shame not to at least quietly celebrate the fact that prices have not risen as much as many economists feared.
“May’s inflation figures may give UK households hope that the cost of living scare may not be as great as feared.
“Food prices actually fell by 0.1% between April and May, and year-on-year food inflation was at its lowest level since December 2024.
“Airline and fuel costs have risen as the price of Brent crude has hovered around $100 a barrel for most of the month, but since the announcement of the US-Iran deal the price has fallen and today is below $80 a barrel.”
Hewson adds: “Today’s rates will be scrutinized by Bank of England policymakers when they meet tomorrow, and it is expected that the market is close to 100 percent that there will be no rate increase at this meeting.”
“There is increasing speculation that any climbing may not be on the table until the end of the year.
“But it’s not all good news, especially when you consider that before the start of the Iran war inflation was expected to return to the Bank’s 2% target now and many expected interest rates to be cut at least once this year.”
Just Mortgages and Spicerhaart chief executive John Phillips says:
“Inflation data again surprised us, remaining stable as the lowest prices rose sharply to counter the growing expectations of a hike.
“However, this is very welcome news – especially ahead of the MPC’s decision tomorrow.
“Prior to this decision, we have news of the US-Iran peace agreement that is ready to be signed.”
Despite doubts about how successful this will be, it is good news that has calmed the markets and oil prices are already reflecting this, he said.
Phillips adds: “As exchange rates continue to stabilize and respond well to this news, we really need to shout this out to our customers.
“We are already seeing movement from lenders across the market, which proves that there is a lot of money out there and lenders are ready and willing to lend.
“Ours is to step up, really engage with our customers and give them the guidance they need to navigate a changing market.”
LSL chief executive Emma Hollingworth says: “The continued reading of inflation gives the Bank of England the breathing space it needs.”
“If inflation had been rising, the Monetary Policy Committee (MPC) would have been under pressure to follow the Bank of Japan and the European Central Bank in raising rates this week.
“Instead, we expect the MPC to hold tomorrow, judging that the risks of a weak economy of higher prices are too great.”
But he says: “The situation in the Middle East remains a major threat to the UK housing market.
“What happens next depends on whether the US-Iran standoff holds.
“If the Strait of Hormuz remains disturbed, global inflationary pressure will continue to increase, and the threat of inflation will return.
“For borrowers, today’s data means that mortgage rates are likely to remain stable in the short term.
“But anyone who is in a flexible standard or approaching a loan window should act quickly as the situation can change quickly.”
