Inflation expected to go up again tomorrow morning – what do you think?

While markets have been encouraged by easing geopolitical tensions, inflation is likely to remind us tomorrow that the economic impact of recent events doesn’t disappear overnight.

My expectation is that CPI will come in around 3.0% to 3.1%, driven primarily by higher energy and transport costs filtering through the system, alongside continued pressure from services inflation. Although the Bank of England has made significant progress in bringing inflation down from its peak, the final stretch back towards the 2% target is proving much harder than the initial decline.

For homeowners and prospective buyers, the key takeaway is that a reading above 3% would reinforce the Bank’s cautious approach to interest rate cuts. While mortgage rates have improved compared to last year, borrowers shouldn’t expect a rapid fall in borrowing costs unless inflation starts showing clearer signs of returning towards target.

My prediction is 3%, with an outside risk of 3.1%. I would not treat this as a shock inflation print, but it would be a very important signal because it shows inflation is still sticky, not beaten.

The US-Iran situation matters, but not just because of oil. Markets move quickly on peace-deal optimism, but inflation data captures what has already fed through the system: energy expectations, shipping risk, supply-chain pricing and business cost decisions made weeks earlier.

The bigger issue is services inflation and wage pressure. If goods inflation moves because of external shocks, the Bank of England can partly look through that. But if services inflation stays stubborn, it becomes much harder to justify cutting rates too quickly.

So for me, 3% is the base case. 3.1% would not be catastrophic, but it would strengthen the argument for a cautious Bank of England and a slower path to rate cuts.

Tomorrow morning delivers a stark reminder that while sentiment moves at the speed of a headline, supply chains move at the speed of a container ship. Markets are trading on classic "buy the rumour, sell the fact" optimism around a US-Iran peace deal, but tomorrow's ONS print looks backward at May, a month heavily exposed to the sharp end of Middle East conflict. The headline CPI figure is highly likely to land on the consensus of 3.0%, with a meaningful risk of a slight upward surprise at 3.1%. April's 2.8% reading offered a temporary reprieve, artificially flattered by the lower Ofgem energy price cap and government changes to the Renewables Obligation scheme, but that tailwind is fading fast. With Ofgem signalling a 13% hike to the domestic energy price cap in July, the direction of travel for the rest of the year is already under pressure.

Markets are cheering a US Iran peace deal, yet tomorrow’s UK inflation print is still set to climb above April’s 2.8%, with most forecasters pencilling in 3% for May. The official inflation number, whatever it lands at, measures the wrong disease. What we call inflation is really the slow loss of your money’s buying power, and that loss does not pause just because the headlines turn hopeful. The Iran conflict has already squeezed energy and the products that flow from it. Higher input costs do not vanish overnight. So an inflation figure above 3% would not surprise me. If anything, the risk runs hotter, not cooler.
And the real worry sits in the bond market. G7 governments owe more than they can comfortably service. Rising yields, not a softening CPI, are the signal to watch.. So my view on inflation- another step up, and stickier than the optimists hope. The gap between the cheerful market mood and the harder economic reality is the story. That gap usually closes the painful way.​​​​​

Inflation is not reflecting today’s prices. It is showing what has already worked through the system over recent weeks.

Given where energy and oil prices have been, and the knock-on effect that has on transport, food and day-to-day costs, I would expect inflation to edge higher, probably somewhere around 3%.

The Bank of England meets later this week, and even with inflation potentially moving up again, I do not think they are likely to change the base rate at this stage. The possible US-Iran peace deal may calm markets, and the Bank will use that as an opportunity to continue with their wait and see approach.