The United Kingdom’s inflation rate fell slightly to 3.4% in May 2025, down from 3.5% in April, according to the latest figures from the Office for National Statistics (ONS). This marks a modest improvement, but the rate remains well above the Bank of England’s 2% target. Economists forecast that inflation could rise again to 3.7% before the end of the year.
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Lower air fares and fuel prices drive dip
The decline in the inflation rate was driven mainly by falling transport costs, particularly air fares and fuel prices. Air travel costs dropped by 5% in May, compared to a 14.9% increase during the same period in 2024. The timing of the Easter holiday, which occurred earlier this year, likely contributed to the seasonal drop in travel prices.
Fuel prices also eased. Petrol and diesel costs fell by 2.1 and 2.6 pence per litre respectively during May. Petrol now sells for an average of 132.4p per litre, down from 148.8p in May 2024. Diesel prices dropped to 139.1p from 156.3p a year ago. These changes helped slow the rise in transport-related inflation, which increased by just 0.7% over the past year.
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Food prices and global tensions keep pressure high
Despite the overall dip in inflation, certain cost pressures persist. Food prices increased by 4.4% over the year to May. This is the largest annual rise since February 2024, and remains a key concern for many households.
Geopolitical developments have also introduced new risks. Tensions in the Middle East are affecting oil markets, raising fears that energy and transport costs could rise again. These developments are being closely monitored by policymakers and analysts.
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Bank of England expected to hold rates
The Bank of England’s Monetary Policy Committee (MPC) is due to announce its next interest rate decision on 19 June. Analysts expect the Bank to keep the base rate unchanged at 4.25%, citing “ongoing global uncertainty” and the limited impact of the recent fall in inflation.
For small business owners, the decision to hold rates may bring mixed feelings. While a steady rate can offer predictability, high inflation and borrowing costs continue to weigh on operations, especially for firms managing tight profit margins.
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Savers urged to act as inflation erodes value
For savers, the challenge remains. Even with inflation slowing, the rate continues to reduce the value of money held in low-interest or non-interest-bearing accounts. Data shows that more than £300 billion is currently held in accounts that offer no interest, a situation experts describe as a “missed opportunity” for many consumers.
While some savings rates have increased slightly, they still lag behind the levels seen in 2024. However, the number of savings accounts offering returns above inflation has grown. Over 1,400 accounts are currently beating the 3.4% rate, including 133 easy-access accounts, 122 notice accounts, and 706 fixed-term bonds.
App-based banks and digital challengers are offering competitive deals, but many of these offers are limited and can be withdrawn quickly. Consumers are advised to “review their options” and consider locking in higher rates where appropriate.
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Impact on small businesses
The inflation environment presents both risks and opportunities for small and medium-sized enterprises (SMEs). Falling fuel prices may offer temporary relief in sectors such as logistics and retail. However, rising food prices and uncertain energy costs could place pressure on input costs for businesses in hospitality and related industries.
With interest rates holding steady, some businesses may look to “refinance existing debt” or explore new borrowing. However, lenders are expected to remain cautious in the current economic climate.
Business owners are encouraged to review financial strategies, consider high-interest business savings accounts, and renegotiate supplier contracts in preparation for future price changes. Managing working capital efficiently will also be important as conditions continue to shift.
