The inflation picture in the UK for May 2025 signals cautious progress. Headline CPI eased slightly to 3.4 percent (from 3.5 percent in April), reflecting modest disinflationary pressure. Monthly CPI rose by just 0.2 percent, slower than the 0.3 percent pace a year earlier and the consensus forecast. Transport costs drove the most significant downward pull on the inflation rate, while rising food prices and household goods softened this effect. Core CPI, which excludes volatile items, also slowed to 3.5 percent from 3.8 percent, indicating easing underlying inflation. However, goods inflation increased to 2.0 percent, suggesting persistent supply-side pressures.

The broader CPIH, which includes housing costs, also dipped to 4.0 percent (from 4.1 percent), with monthly growth halving year-over-year (0.2 percent vs. 0.4 percent). Core CPIH decelerated to 4.2 percent, down from 4.5 percent, though services inflation remains relatively elevated at 5.3 percent. Notably, a previous overstatement caused by a vehicle excise duty error in April has been corrected in the May data.

The data reflects a slow but steady easing in inflationary pressure, with services still sticky. The Bank of England may view this as incremental progress but will likely remain cautious about cutting rates too soon given persistent core and housing-related inflation. This latest update takes the RPI to 14 and the PI-P to 24, meaning that economic activities continue to stay well ahead of market expectations in the UK.

UK annual inflation seen unchanged at 3.5 percent in May from 3.5 percent in April. Month on month, the consensus looks for an increase of 0.3 percent after surging by 1.2 percent in April.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.