Inflation set to bounce back to 3%

Inflation is set to rebound to around 3% in May, up from 2.8% in April, as economists cite higher airfares and vehicle duty as key drivers. Ofgem’s 7% energy-price cap cut in April kept energy inflation in check for that month, but expectations of renewed energy-price pressure persist into May due to the Middle East conflict and supply concerns. Pantheon Macroeconomics expects a strong rebound in airfares as firms unwind discounting in May, while vehicle excise duty could add about 0.1 percentage points to the headline rate after revisions to April 2025. The year-on-year comparison is likely to lift the annual inflation rate further in May. Market participants anticipate the Bank of England will hold the policy rate at 3.75% at Thursday's meeting, despite calls for tighter policy due to inflation risks. Economists see inflation likely to remain elevated into the second half of 2026, with a peak between 3.5% and 4% under a benign scenario related to the Middle East conflict. The ECB's rate decision last week reinforces a divergent path for Europe, while both the U.K. and euro area remain net energy importers exposed to price swings. Analysts warn that ongoing energy-price volatility could push inflation higher, complicating monetary policy.