Inflation in the UK economy has unexpectedly flatlined on last month at 2.8%, the Office for National Statistics (ONS) reported.
The consensus forecast was for a figure of 3%, with rising fuel costs as a result of the Middle East war expected to force average prices higher.
The Bank of England meeting tomorrow now looks set to see a hold on rates at 3.75% rather than a rise, which some forecasters earlier saw as the likely consequence of climbing inflation.
The lower-than-expected headline figure indicates weakness in other areas of the economy is counterbalancing higher energy prices.
With a peace deal being struck between the US and Iran and oil supplies likely to significantly increase as a result, falling fuel prices could see inflationary pressure recede further over the coming months.
Michael Field, chief equity strategist at Morningstar, said: “Investors will be pleased to see May’s inflation number come in slightly lower than expected at 2.8%. Coupled with the Iran peace announcement, and the belief that inflation will fall from here, markets will be further buoyed.
“Economists are heavily predicting the Bank of England will keep interest rates on hold tomorrow, a decision that now makes even more sense given today’s inflation reading.
“It may take a while for inflation to fall to the bank’s 2% targeted level, but the fears of runaway inflation are much lessened from a month ago.”
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Susannah Streeter, chief investment strategist, Wealth Club, said: “The pressure cooker of prices is off the boil with inflation staying stable and oil prices retreating further.
“May’s surprise inflation reading for the UK will add to hopes that the cost-of-living scare induced by the Middle East crisis will be shorter-lived. It shows that despite higher energy costs infiltrating fuel prices and air fares, underlying price pressures are easing across the economy.
“While inflation remains above the Bank’s 2% target, disinflationary forces are creeping in. Housing and household services inflation eased to 2.7% from 3%, while food and non-alcoholic beverage inflation slowed further to 2.2% from 3%.
“This reinforces expectations that the Bank of England will press pause tomorrow and keep interest rates at 3.75%. It’s likely to mean policymakers will hold off on increasing rates until later in the year.”
Andrew Wishart, senior UK economist at Berenberg, added: “The undershoot in CPI inflation compared to forecasts in May suggests the indirect effect of higher global energy prices on inflation will be smaller than we had assumed.
“Economist estimates were skewed towards a higher result, making the miss even more striking than it first appears.
“The downside surprise was due to lower food and goods prices than we expected, suggesting that firms lack the pricing power necessary to pass on the increase in their energy costs,” he continued.
“All this should gradually shift markets towards our view that the BoE will not hike this year. The pass-trough from the rise in energy prices to consumer prices appears more limited than the central bank expected.”
