Deutsche Bank forecasts UK headline CPI at 3.01% year-on-year in May, alongside core CPI of 2.72% and services CPI of 3.65%. For the wider path, the bank expects CPI to average 3.1% this year and then ease to 2.6% in 2027 before reaching 2.3% in 2028, while maintaining that the balance of risks is tilted higher.
The projected profile reflects a rebound after April’s drop, as services prices are expected to unwind and food plus core goods pressures persist. Deutsche Bank also points to July’s dual-fuel bill reset as a fresh source of price momentum, even as downward-sloping oil and gas futures curves have led it to trim its CPI peak assumption. Price survey data are cited as indicating stronger pipeline pressures than the bank’s models imply.
Outloook For UK Inflation: Rebounds, Risk, And Persistence
Based on the view that UK inflation will be stickier than expected, we see the recent dip below 3% as temporary. After April’s CPI data from the ONS showed a drop to 2.8%, we now project a rebound to 3.01% for May. This is due to persistent price pressures in the services and food sectors that are likely to re-emerge.
Looking ahead, we expect these pressures to build, particularly with the reset of dual fuel energy bills scheduled for July. This will likely keep inflation elevated, and we see CPI averaging around 3.1% for the remainder of 2026. The path to the 2% target will be slower and bumpier than many anticipate.
Positioning For Interest Rate Risk: Market Opportunities And Hedging Strategies
The market appears to be underpricing this risk, with SONIA futures contracts implying the Bank of England’s policy rate will hold steady at its current 4.25% through the end of the year. We believe the chances of a more hawkish response from the Bank are growing. This disconnect presents an opportunity for derivative traders.
In the coming weeks, we should position for a repricing of UK interest rate expectations. Selling December 2026 SONIA futures is a direct way to express this view. We could also look to pay the fixed rate on 2-year interest rate swaps, which would profit if the market starts to price in a higher for longer rate scenario.
The analysis highlights that risks are “skewed firmly to the upside,” which means we should consider buying options to protect against a sharp, unexpected move. Payer swaptions, which provide the right but not the obligation to enter a swap paying a fixed rate, are an effective way to gain this exposure. These instruments are relatively inexpensive given the market’s current calm outlook.
We have seen this pattern before, particularly in 2023, when stubborn services inflation forced the Bank of England to hike rates well beyond initial market forecasts. The current economic data points toward a potential repeat of that scenario. We should therefore be positioned for surprises on the upside for both inflation and interest rates.
