Weekly Briefing: Sticky Inflation, BoE Rates Decision,   Property Price Movement & Dividend Tax Adjustments

This week’s briefing takes a look at four stories revealing our economic outlook. From recent inflation data and the Bank of England's (BoE) rate decision to recent property price action and the potential adjustment of dividend taxation.

Read on for insights into each.

Inflation eases, but sticky pressures remain

• Inflation in the UK edged down slightly to 3.4% in May.. While the fall in petrol and air fares helped lower the overall figure, food prices moved sharply in the opposite direction, with annual food inflation rising to 4.4%, up from 3.4% the month prior.
  
  
• This unexpected rise in food costs complicates the Bank of England’s already delicate balancing act. While core inflation, excluding food, energy, and alcohol, dropped to 3.5%, policymakers are cautious.
  
  
• Air fares dropped by 20 percentage points from April to May, unsurprising given the shift in Easter timing, but it's not enough to offset persistent inflation in services and goods. Furniture and household item costs climbed, while clothing and footwear continued to slide, now 0.3% lower year-on-year. Services inflation is finally cooling, falling to 4.7% in May from 5.4%, but it’s still uncomfortably high.
  
  
• The Office for National Statistics (ONS) also admitted to a small overestimate in April’s CPI due to a car tax weighting error, yet another reminder that economic data isn't always perfect. Still, even with that correction, the broader trend is one of stubbornly rising prices in the face of weakening growth. Wages have slowed, unemployment has crept up, and the economy shrank in April.
  
  
• Chancellor Rachel Reeves has been quick to press the Bank for more urgency in cutting rates, citing the impact on mortgage bills and borrowing costs. However, economists caution that persistent wage growth and global uncertainty, especially tensions in the Middle East, could easily keep inflation above 3% for the rest of the year.
  
  
• As Ruth Gregory from Capital Economics put it: “The third consecutive rise in food price inflation will be a bit of a blow for the Bank... perhaps a sign that firms are passing on more of April’s rise in national insurance contributions in their selling prices.”

Global shocks keep pressure on rates

• Largely on the back of the previous story, the Bank of England held interest rates steady at 4.25% this month. Governor Andrew Bailey stressed the unpredictability of the current environment, noting rising prices and a fragile labour market as key reasons to tread carefully.
  
  
• The conflict in the Middle East, particularly between Israel and Iran, has sent oil prices soaring, up nearly 25% to $79 per barrel since the MPC's last meeting. That surge has global consequences, with energy feeding directly into inflation and undermining consumer spending power. This is particularly worrying for UK households, who are still recovering from the ‘cost-of-living crisis’ of 2022 and 2023.
  
  
• Policymakers fear this renewed pressure could reignite wage demands, setting off another cycle of inflation persistence. Rising food costs, including beef, cocoa beans, and coffee, are also being monitored closely. The BoE acknowledged that inflation expectations could be pulled higher, prompting workers and businesses to demand more in the months ahead.
  
  
• Despite holding rates steady, the MPC maintains its guidance that rates will “gradually” come down. But it’s clear they’re not in a rush. There’s little appetite for tightening, but equally little room to cut without risking another wave of inflation.
  
  
• On the upside, there are some signs of resilience. Progress on trade deals is expected to soften the blow from US tariffs, and officials are watching closely for any evidence that the labour market softness translates into a reduction in consumer price inflation. But the Bank has warned: external volatility can derail even the best-laid plans

UK house prices dip after stamp duty cut ends

• UK house prices saw their steepest monthly fall since 2021 in April, as the end of the temporary stamp duty holiday triggered a swift market correction. Prices dropped by 2.8% between March and April, bringing the average home value down to £265,000. It’s a similar pattern to the one we saw in mid-2021, when a previous stamp duty break ended and prompted a drop in demand.
  
  
• Industry voices were quick to downplay the drop. Jackson-Stops’ Nick Leeming said April’s fall reflected a post-deadline lull, while Yopa’s CEO, Verona Frankish, called it “a brief market correction.” Buyers who missed the stamp duty window appear to have renegotiated deals, leading to temporarily lower prices that don’t reflect wider market weakness.
  
  
• There’s also optimism that the longer-term trends are more stable. May saw a rise in instructions and completions, and several estate agents noted that both sellers and buyers are returning to the market with renewed confidence.
  
  
• High mortgage rates and stretched deposit requirements continue to weigh on first-time buyers, but analysts think the market’s resilience signals we’re more likely to see gradual growth than another crash.
  
  
• As Marc von Grundherr of Benham and Reeves put it: “Any initial reduction in house prices as a result of the stamp duty deadline will have been short-lived.”

Investors fear a dividend tax hike could backfire

• Analysts believe Chancellor Reeves may raise taxes by up to £20bn in the Autumn Budget, with dividend tax changes reportedly under review, including increasing the top 39% rate or scrapping the £500 allowance, which would raise £325m.
  
  
• Wealth advisers at St James’ Place warn such moves would fail to boost revenues, as higher dividend taxes would trigger a shift in how individuals structure income, favouring salary over dividends and pushing more to seek tax-efficient strategies.
  
  
• Claire Trott, head of advice at SJP, said changes “would mean a rethink for many on their remuneration strategy,” adding that “possibly not yielding revenue gains for the government.”
  
  
• Business groups like the IoD and the Recruitment and Employment Confederation have already linked higher national insurance contributions to reduced business investment appetite, suggesting firms are pulling back on hiring (reinforced by recent data).
  
  
• Concerns also extend to ISA usage, as experts suggest cuts to the dividend allowance could drive investors toward tax-efficient investments.
  
  
• Another option being weighed is raising the bank surcharge from 3% to 5%, which could generate £700m, but UK Finance chief David Postings warned this would damage competitiveness, saying, “Banks based in the UK already pay a significantly higher rate of tax... than in other European capitals.”

Final Note

This week’s briefing highlights a few concerning trends across key economic indicators in the UK. Inflation remains persistent, interest rate decisions appear uncertain, and the job market continues to show signs of weakness, contributing to a more cautious economic outlook. In this environment, diversification remains a valuable tool for investors. For a closer look at the different approaches to portfolio diversification, we’ve broken them down here.

As noted in last week’s briefing, the government’s recent spending plans appear to have created a financing gap, adding further uncertainty ahead of the Autumn Budget. While much remains speculative at this stage, we’ll continue to monitor developments closely, keeping you informed with the insights you need to navigate today’s shifting investment landscape.