Geopolitical volatility provides another headache for the Bank of England

Year-on-year inflation in May remained steady at 3.4%, following a recording in April that was revised down from 3.5% by the Office of National Statistics due to incorrect road tax data.

Inflation now sits well above the Bank of England’s 2% target and is set to rise even higher, peaking in the third quarter of this year, nearing 4%. This comes as a result of regulated price and tax increases, including the greater financial burden on UK businesses and the higher cost of utility bills.

Geopolitical uncertainty continues to carry with it inflationary concerns. Adding to the ongoing tariff saga and the potential knock-on effect on the price of exports, escalating tensions between Iran and Israel has already driven up oil prices, with the largest daily rise in the last three years recorded last Friday. While the Russo-Ukrainian conflict and subsequent energy crisis has led to moves (particularly across Europe) to reduce reliance on oil and gas, price increases in these energy commodities continue to have a global inflationary effect that has implications for the UK economy.

This is not an ideal scenario for the Chancellor. The sustainability of her spending promises is critically dependent on changing this — kick starting the economy to grow GDP and collect more revenue through tax receipts. Without this, the Chancellor may be forced into unwanted — and unpopular — tax increases in the Autumn Budget to keep public finances on track.

Yet, there remain reasons for optimism in the battle against inflation. Earnings growth, which has been a persistent worry for the Bank, is now moving in the right direction — a fall by 0.8 percentage points from December to April takes average weekly earnings growth to 5.3%, its lowest value since September 2024. In the long-term, high earnings growth, an underlying inflationary pressure, is more important than regulated price and tax increases that have a one-off inflationary effect.