Inflation latest: What May’s higher-than-expected reading means for interest rates and mortgages

“The Bank of England must do the right thing and resume cutting interest rates this week” – Paul Nowak, TUC

High interest rates are not the answer to tackling sticky inflation, union leaders have warned, after a higher-than-expected reading for last month.

Lower borrowing costs are needed to help ease the pressure on households, businesses and government borrowing, the TUC argued, as it emerged that the annual rate of consumer prices index (CPI) inflation held largely steady in May.

The latest official data revealed a figure of 3.4 per cent for last month. While the Office for National Statistics (ONS) said that an error in vehicle tax data collected meant April’s CPI rate should also have been 3.4 per cent, it would not be revising the official figure of 3.5 per cent.

Consumers will be finding that their money does not stretch as far as it did a year ago, while interest rates on savings have been falling.

Regardless, most economists had been expecting CPI to come in at just 3.3 per cent for May as price rises cooled following a raft of bill increases the previous month that pushed inflation to the highest level in more than a year.

TUC general secretary Paul Nowak said: “As the international picture gets more turbulent with every passing day, global uncertainty alongside increased energy and water costs are keeping prices high. High interest rates just make cost pressures worse and are not the answer to stubborn inflation.

“The Bank of England must do the right thing and resume cutting interest rates this week. This will put more money in people’s pockets, enhance businesses’ ability to grow, and make sure our public services can thrive.”

The inflation data was released just a day before the Bank of England’s latest decision on interest rates, with a majority of analysts anticipating a hold as policymakers weigh up a number of conflicting factors. They are likely to gain some solace, however, in the news that inflation has fallen back slightly, month on month, on an official level at least.

Experts have warned that mortgage interest rates could creep up as the inflation 'blip morphs into a block'.

“They were expecting inflation to remain well above target at this point in the year, so it won’t necessarily spark a rethink on rates,” noted Sarah Coles, head of personal finance at investment platform Hargreaves Lansdown. “Before the announcement, the markets were expecting two more cuts by the end of the year, and there’s a reasonable chance this won’t move significantly on the back of today’s news.

“Of course, the June [inflation] figures could bring decidedly less welcome news. The spike in energy prices caused by geopolitical instability will feed through into pain at the pumps, and will start to pass through into the costs of producing and transporting all other goods.”

Interest rate expectations are a major factor in pricing savings, annuities and mortgages and with more rate cuts expected this year, there will be downward pressure on the rates charged on those products. The other major factor driving the market is bond yields, and these are being driven by forces outside the UK.

Coles said investors were taking fright at the US government’s plans to tax less and spend more. They are also concerned about the credit downgrade of the world’s largest economy.

“This means the markets are being pulled in opposite directions,” she added. “It tends to be easier to see in the mortgage market, because margins are so tight, so we’ve seen some lenders cut rates and others raise them. For savings and annuities it tends to mean less movement altogether.”

Peter Stimson, director of mortgages at lender MPowered, warned that mortgage interest rates could creep up as the inflation “blip morphs into a block”.

“It’s proving worryingly sticky and the crescendo of war drums in the Middle East may make things worse,” he noted. “Oil prices spiked 5 per cent on Tuesday - reaching their highest level of 2025 so far - and there’s a danger that they will push up manufacturing and transport costs in coming months, and allow inflation to take root.

“That’s why the prospects of the Bank of England cutting its base rate again on Thursday - already very slim - have evaporated.

“For anyone planning to buy their first home or remortgage this summer, who’d been assuming that the only way is down for mortgage interest rates, today’s data will be an uncomfortable reality check. Mortgage rates may well have fallen as far as they can for now, and in the coming weeks rates may even creep up back as lenders recalibrate in response to rising swap rates.”

Air fares

The ONS said that food and non-alcoholic drink prices rose by 4.4 per cent in the year to May - the highest level in more than a year. Cupboard items like sugar, jam and chocolate as well as ice cream saw the biggest monthly price hikes, while meat costs also rose.

On the other hand, air fares fell by 5 per cent between April and May, following the Easter holidays when ticket prices were likely to have been hiked. Average petrol and diesel prices also dropped.

Guy Foster, chief strategist at wealth firm RBC Brewin Dolphin, said: “A helpful fall in services inflation will boost the case for rate cuts, but the series was distorted by volatile air fares and the correction of a previous error.

“Like most central banks, the Bank of England has spent much of the last few years comfortably exceeding the inflation target and, having cut several times already, they will now be on hold at this week's meeting.

“By the meeting after next, in August, it may be clearer how the national insurance rise is affecting employment, where some worrying signs have begun to emerge.”

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