The UK's inflation rate dropped slightly to 3.4% in May, down from 3.5% in April, according to the latest data from the Office for National Statistics (ONS). While this marks a small relief, inflation still sits well above the government's 2% target and is forecast to rise again to 3.7% later in the year.
The dip was mainly driven by lower air fares and falling fuel prices. Air travel costs fell by 5% in May, compared to a sharp 14.9% rise during the same period last year. Fuel prices also continued their decline, with petrol and diesel costs falling by 2.1 and 2.6 pence per litre respectively in the past month.
However, rising food prices—up by 4.4% over the past year—partially offset the decline, and experts warn that ongoing tensions in the Middle East could soon push transport and energy costs back up.
Despite the fall in inflation, the Bank of England is expected to keep the base interest rate steady at 4.25%, citing global financial uncertainty.
For savers, inflation continues to eat into the value of their money. Though some variable and fixed savings rates have increased slightly, most are still below last year's peak. With over £300 billion sitting in non-interest-bearing accounts, savers are being urged to review their options.
More than 1,400 savings accounts currently offer returns above inflation, including fixed bonds and easy access deals. But competition is fierce, and top rates can disappear quickly.
Small business owners and individuals are advised to monitor interest rates closely and act fast to take advantage of the best offers on the market.
UK inflation slows to 3.4% in may, but experts warn pressure could return
The United Kingdom's inflation rate eased slightly to 3.4% in May 2025, according to fresh data released by the Office for National Statistics (ONS). This marks a small decline from the 3.5% recorded in April, offering cautious relief for consumers and businesses alike. However, the latest figures still place inflation significantly above the Bank of England's 2% target — and forecasts suggest the rate could climb again to 3.7% before the end of the year.
The easing in inflation is largely attributed to falling air travel and fuel costs. Air fares, in particular, saw a 5% drop between April and May — a stark contrast to the 14.9% rise during the same period in 2024. This shift has been linked to the timing of the Easter holiday, which occurred earlier this year and caused price spikes in April before cooling off by May.
Motor fuel prices also contributed to the slowdown. The cost of petrol and diesel fell by 2.1 and 2.6 pence per litre respectively over the past month, with prices now sitting at 132.4p for petrol and 139.1p for diesel. Compared to May 2024, when prices stood at 148.8p and 156.3p, the year-on-year drop has helped ease transport-related inflation, with overall transport costs rising just 0.7% in the 12 months to May.
Despite these positive signals, inflationary pressure persists in key areas. Food prices surged by 4.4% year-on-year, marking the sharpest increase since February 2024. Meanwhile, geopolitical tensions in the Middle East have begun affecting global oil markets, raising concerns that energy and transport costs may rebound in the months ahead.
interest rates likely to stay put
The Bank of England's Monetary Policy Committee (MPC) is set to announce its next interest rate decision on June 19. Analysts widely expect the central bank to maintain the base rate at 4.25%, citing ongoing global uncertainty and the limited impact of May's inflation drop.
For small business owners, the decision will be a double-edged sword. While stable rates offer some predictability for financial planning, continued high inflation and borrowing costs remain a source of concern for many SMEs already navigating tight margins.
savers urged to act amid shifting market
Inflation continues to erode the value of cash savings, especially for consumers holding funds in low-interest or non-interest-bearing accounts. Although some short-term and variable savings rates have crept up slightly, they remain below the market-leading rates seen in mid-2024.
According to recent data, over £300 billion is currently sitting in non-interest-bearing accounts — a figure that financial experts describe as a missed opportunity for savers. Meanwhile, the appetite for tax-free savings remains strong. The Bank of England reported a record £14 billion inflow into ISAs in April 2025, reflecting a desire among consumers to protect their money against inflation.
Challenger banks and app-based providers have dominated the top of the savings rate charts, often offering competitive fixed-rate bonds and easy access options. However, many of these top deals are limited and can be withdrawn quickly as providers manage demand.
More than 1,400 savings accounts currently beat the inflation rate, including 133 easy-access accounts, 122 notice accounts, and 706 fixed-term bonds. Experts advise savers to compare rates actively and consider locking in longer-term options where suitable.
what this means for small businesses
For small businesses, the current inflation environment presents both risks and opportunities. Input costs may see short-term relief thanks to falling fuel prices, but uncertainty around energy costs and rising food prices could affect sectors like retail, logistics, and hospitality. Meanwhile, the steady base rate may encourage some businesses to pursue growth loans or refinance existing debt, but lenders are likely to remain cautious.
Business owners are advised to monitor inflation trends closely and review their financial strategies. This includes exploring high-interest business savings accounts to preserve capital, negotiating supplier contracts ahead of potential price hikes, and managing working capital effectively as cost pressures continue to shift.
As the economic outlook remains mixed, agility and proactive planning will be key for small businesses aiming to stay resilient and competitive through the remainder of the year.
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