Benign UK food inflation keeps CPI below 3%
The desk interprets the recent data revealing UK food inflation remaining subdued, with CPI holding below 3% in May, as a potential indication against imminent rate hikes from the Bank of England. Per the full note from ING, this decline in food prices, coupled with a projected CPI peak of just 3.5% in September, suggests that the central bank may not find sufficient justification for a policy shift in the near term. Despite concerns over future costs from the Middle East crisis impacting energy prices, the initial data points show reduced inflationary pressures overall, aligning with observations seen in the eurozone. This finding is particularly relevant amid current market positioning as traders assess the BoE's trajectory in the coming months.
What the desk is arguing
The thesis centers on the potential for the Bank of England to maintain current interest rates in light of the unexpectedly low CPI numbers, particularly driven by benign food inflation. Per the full note from ING, the UK's CPI being held at 2.8% reflects significant downward pressure from food prices, which have fallen month-on-month, a trend also seen in other regions such as the eurozone.
Support for this position is underscored by the forecast of inflation peaking around 3.5% by September, not meeting thresholds that would typically prompt a tightening cycle. Current producer price data further supports this outlook, indicating continued falls in food inflation through the summer.
Where it sits in our coverage
Our consensus target for the GBP/USD rests at 1.075, with a range from 1.04 to 1.12. Specific firms contributing to this outlook include: - jpmorgan: 1.10, Mar-26 - bofa: 1.04, Mar-26
The desk's view maintains coherence with the consensus clustering towards the middle of this range, indicating expectations for stable monetary policy continuing through the year ahead.
How other firms see it
Firms are generally aligned in their expectations surrounding the Bank of England's potential action, with jpmorgan and bofa falling on opposite ends of the spectrum – the former aligned with our bullish stance, the latter showing caution regarding market conditions.
closely watch related pairs such as EUR/GBP as these rates are sensitive to the BoE's decisions and economic data.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK CPI remains below 3%, surprising markets amid energy price volatility.
- 02Food inflation's decline suggests near-term stability for BoE policy.
- 03Projected inflation peak of 3.5% by September likely insufficient for rate hikes.
- 04Producers indicate continued lower food inflation in upcoming months.
Market implications
Keep an eye on the GBP/USD, particularly around the 1.075 target level, as the market assesses the implications of ongoing inflation data and potential policy direction from the BoE. Additionally, monitor any changes in producer prices for food, as these may impact trader sentiment and position adjustments.
Risks to this view
Should energy prices escalate sharply due to geopolitical tensions, this could shift the inflation landscape dramatically, potentially forcing the Bank of England into a more aggressive stance than currently anticipated. A significant uptick in services inflation could also shift expectations for monetary policy.
Older quick take Quick take 08:06 United Kingdom Benign UK food inflation keeps CPI below 3% The UK is the latest country to experience remarkably benign food inflation in May, despite the Middle East crisis which threatens to push up costs later this year. If energy prices stay where they are, we're likely to see inflation peak around 3.5% in September. We don't think that meets the bar for rate hikes Food prices fell in May relative to April, a trend we’ve also seen in the eurozone and Eastern Europe Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK May’s lower-than-expected UK inflation figures are the latest data point questioning the need for rate hikes.
We see inflation peaking around 3.5% in September on current energy prices. That’s unlikely to justify a rate rise from the Bank of England. What’s striking about these latest figures is just how benign food inflation is right now.
It’s a key reason why headline CPI unexpectedly stayed at 2.8%, despite upward pressure from airfares and a quirk related to road tax. Food prices fell in May relative to April, a trend we’ve also seen in the eurozone and Eastern Europe. If anything, the latest producer price data suggests food inflation will continue to fall sharply over the next couple of months.
That will change over time as the increase in fuel and fertiliser prices will push up food costs into next winter. But given how much ink has been spilled by Bank of England officials on the role of food prices in shaping consumer inflation expectations, today's data will be welcome. Producer prices point to lower food inflation into summer Source: Macrobond, ING "> Source: Macrobond, ING Overall, it’s too early to see much impact from the Middle East crisis beyond fuel prices.
Services inflation is bouncing around, partly due to the timing of Easter this year, but the Bank of England’s preferred gauge of “core services” – which excludes volatile and indexed categories – has been more stable at just below 4%. The BoE’s own “Decision Maker Panel” of CFOs points to services inflation staying around current levels in the summer. Beyond that, we’re still sceptical that the Middle East crisis will generate the widespread “second round” effects that policymakers so fear.
Evidence from 12 months ago, when a National Insurance (payroll tax) and minimum wage hike failed to do much to the inflation picture, suggests corporate pricing power is considerably weaker than it was during the last energy shock four years ago. The same is true of worker bargaining power. Wage growth has been exceptionally weak over the past few months.
The BoE's 'core services' measure has stabilised below 4% Source: Macrobond, ING "> Source: Macrobond, ING All of that suggests inflation is likely to stay below 4% – a key line in the sand for the BoE. It put a lot of emphasis last summer on analysis showing second-round effects were more likely when inflation exceeded that level. A 13% rise in household energy bills this July is likely to take inflation towards 3.5% by September, but on current prices, we’re likely to see a 7% fall in those bills come October.
That’s because natural gas futures for delivery in 6-12 months are at pre-war levels – and they are a key determinant of the energy regulator’s price cap. Barring the Iran deal falling apart and oil prices spiking back above 100 USD/bbl – and natural gas costs soaring too – we think the Bank of England is set for a prolonged pause. We expect a 7-2 vote in favour of ‘no change’ tomorrow – and a return to rate cuts in 2027.
UK inflation Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more Older quick take
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