Inflation stuck at 3.4% as food prices rise

Sara White, Editor, Business & Accountancy Daily

Rising food prices, housing and IT and telecoms kept inflation stubbornly high at 3.4%, well above comparable rates in Europe.

The risk of higher prices remains a major concern as businesses struggle to absorb the chancellor’s £23bn tax raid due to hike in employers’ National Insurance contributions (NICs), which only came into effect in April.

Repeated warnings flagged in business surveys in the last month showed that the rise has already hit jobs, resulting in frozen pay and reduced hours for many workers, and a freeze on new hires across many companies.

Chand Chudasama, partner and corporate finance expert at Price Bailey, said: ‘Inflation, including housing costs, remains stubbornly high at 4%, with core inflation at 3.4% - placing the UK back where it stood in February 2024.

‘As accountants and business advisors, we are concerned that the full impact of the recent national insurance rise has yet to be reflected in these figures; input costs have risen, and this will compound inflationary pressures as the financial year progresses.’

Global headwinds and instability in the Middle East is already pushing up oil prices, which will feed through to the pump quickly, impacting transport inflation.

Professor Joe Nellis, economic adviser at MHA, said: ‘Inflation now sits well above the Bank of England’s 2% target and is set to rise even higher, peaking in the third quarter of this year, nearing 4%.

‘This comes as a result of regulated price and tax increases, including the greater financial burden on UK businesses and the higher cost of utility bills.

‘Geopolitical uncertainty continues to carry with it inflationary concerns. This means that it will take the Bank most of next year to curtail inflation, and the 2% target may not be reached until 2027.’

Effectively there was no improvement in the inflation rate from ‘awful April’, although the ONS did adjust the original CPI rate down from 3.5% to 3.4% due to the government providing incorrect car tax data last month.

‘The largest downward contribution to the monthly change in annual inflation rates came from transport; the largest, partially offsetting, upward contributions came from food, and furniture and household goods,’ the ONS said.

The one positive note was falling transport costs in May 2025, with cheaper airfares feeding into the figures while clothing prices contracted 0.4% and furniture was down 0.5% year on year.

Despite lower transport costs, the overall inflation figure, in line with economists’ expectations, remained high as food prices shot up again, affecting everyone’s shopping basket.

Year on year, the inflation picture is worrying, with the May 2024 CPI rate standing at 2.8%, showing over half a percentage point deterioration since last year.

In terms of year on year rises, food was up 4.4%, alcohol up 5.7%, housing costs shot up 7% and IT while communications, including mobile and broadband, were up 5.8% in the May figures.

Nicholas Hyett, investment manager at Wealth Club, said: ‘Higher food and drinks costs offset most of the easing in inflation from other sources - with the annual increase in food and drink prices rising from 3.4% in April to 4.4% in May. The net result is that UK inflation remains high, and far higher than elsewhere in Europe.

‘That is unwelcome but not unexpected. The hope was that price increase would slowly roll off over the course of the next 12 months as we annualise things like council tax hikes and the effect of April’s higher labour costs. The turmoil in the Middle East has upset that.’

Overall services inflation was 5.3%, reflecting a small improvement in this area, with a 0.5% drop on last May 2024.

Commenting on the impact of the latest inflation figure on SMEs, Neil Rudge, chief banking officer for commercial at Shawbrook, added: ‘The pressures facing small businesses aren’t going anywhere fast.

‘SMEs are being required to absorb more and more - higher wages, increased employer National Insurance contributions and ever rising material costs to name a few - but often without the profit margins required to do so.

‘Signals of support in Rachel Reeves’ spending review may also provide some further hope, but business leaders remained unconvinced that it offers enough.’