The week ahead 26 May 2026 - UK inflation weaker than expected
What to watch out for in the UK economy and property market this week.
Last week saw data released that suggests growth is becoming more of a concern than inflation in the UK, something that could leave the Bank of England rate setters with a dilemma.
April saw a decline in CPI inflation to 2.8%, down from 3.3% in March. Despite the surge in petrol prices, the introduction of a new OFGEM energy bill cap was widely expected to bring about a brief fall for inflation, but the consensus forecast was for a drop to 3.0%. While there is little doubt inflation will rise in the coming months, it is possible the uptick might not be as strong as previously supposed. Core inflation (which excludes volatile items like food and fuel) slid from 3.1% in March to 2.5% in April, which suggests that beyond the petrol pump, there is littleu pwards pressure on prices at the moment.
This creates the possibility that some on the Bank of England’s Monetary Policy Committee might argue that the case for interest rate rises is weakening. Hiking the Base Rate will have no impact on oil prices, while recent data on the labour market show pay growth has decelerated to just a marginal 0.1% in real terms. The unemployment rate increased from 4.9% in February to 5.0% in March. This does not look like an economic environment where inflation could surge as high as was seen in 2022-2023.
Last week saw other signs the UK economy is slowing, which further counts against hiking the Base Rate. The PMI business activity index dropped from 52.6 in April to 48.5 in May. Also, retail sales in April fell month-on-month by -1.7%, or -0.4% if automotive fuel sales are excluded. The March retail sales recorded a surge in petrol sales as drivers filled up in anticipation of higher prices to come, hence the decline in April. This could mean consumers are changing their behaviour to limit the impact of price rises, pointing to more thrifty consumption patterns this year – another downwards pressure on growth.
The great concern has been the Middle East war might cause stagflation – where inflation is high but the economy is at a standstill. Recent data suggests that inflation this year might not go as high as expected, therefore growth becomes the greater concern. To this backdrop, we believe the Bank of England will leave interest rates unchanged at its next meeting on 18th June, with possibly one increase of 25 bps later in the year.
This week's figures
Thursday 28 May
Euro Area Economic Sentiment, May
93 previous
90 forecast
Sentiment on the economic outlook has been declining this year in the face of multiple geo-political risks. We believe higher fuelcosts will cause the index to fall again.
Friday 29 May
Nationwide UK House Price Index, y-on-y, May
3% previous
2.8% forecast
UK house price growth has held up remarkably well in recent months, despite higher mortgage rates. The arrival of the busytime for the housing market in spring and summer persuades us to forecast continued growth, but at a slower pace.
