Is the cost of living crisis over? Here's what the data reveals

While the UK's annual inflation rate is 3.4% in May, down from 2022 peaks and projected to approach the Bank of England's 2% target, a broader four-year view reveals a 25% increase, reflecting sustained price increases since 2022. This discrepancy highlights a disconnect between official data and lived experiences, as consumers feel the impact of prices that have risen and remained elevated. Moreover, geopolitical instability, exemplified by the recent 18% surge in oil prices due to Middle East conflict, and the potential inflationary effects of deglobalization trends introduce significant uncertainty and potential for volatility in future inflation figures.

Analysis

The UK's current inflation landscape presents a nuanced picture, with the May annual inflation rate at 3.4%, notably above the Bank of England's 2% target, yet significantly below the double-digit peaks of 2022. While the central bank anticipates a return towards its target within the next one to two years, potentially aided by interest rate cuts, a longer-term perspective reveals a substantial 25% cumulative price increase over the past four years. This sustained elevation in the price level, rather than a reversion, highlights an ongoing cost of living pressure that resonates more with consumer experience than the annual rate alone, with this four-year inflation metric reaching levels unseen since the early 1990s. Compounding this underlying pressure are significant, difficult-to-model geopolitical and structural risks. Notably, military conflict in the Middle East has already contributed to an 18% surge in oil prices in June alone, and the broader implications of global tariff policies and the trend towards deglobalization introduce considerable uncertainty and potential for further inflationary impulses, despite initial Bank of England estimates suggesting a small impact from tariffs. These factors collectively suggest a period of heightened volatility and an upside risk to inflation forecasts, potentially challenging the prevailing official outlook.

Key Decisions for Investors

• Investors should scrutinize the divergence between short-term inflation data and the multi-year cumulative price impact, as this may affect consumer discretionary spending and corporate margin resilience more profoundly than annual figures suggest.
• Maintain heightened vigilance towards geopolitical flashpoints and their impact on energy prices, such as the recent 18% oil price increase in June, and assess the inflationary pass-through potential from broader commodity market volatility.
• Consider portfolio adjustments to account for potential persistent inflation, evaluating exposures to sectors sensitive to rising input costs and supply chain disruptions linked to deglobalization and evolving trade policies.
• Approach assets sensitive to interest rate expectations with caution, as the identified inflationary risks could potentially delay or diminish the scope of anticipated monetary easing by the Bank of England.