21 May 2026: Bailey Says Food Price Controls ‘Not Sustainable’

U.K. inflation eased to 2.8% in April, according to preliminary data from the Office for National Statistics. Economists polled by Reuters had expected the inflation rate to fall to 3%, down from 3.3% in March, largely due to the energy price cap introduced by the U.K.’s energy regulator, Ofgem, on April 1. However, consumer prices are expected to continue rising as higher energy costs resulting from the war in Iran take effect.

“There was a notable fall in annual inflation, led by lower electricity and gas prices. This was due to the Government’s energy support package reducing variable and fixed tariffs, along with lower global wholesale energy prices before the conflict in the Middle East, which fed through to the reduction in the Ofgem cap,” Grant Fitzner, chief economist at the ONS, commented on social media yesterday.

Smaller rises in water and sewage bills and road tax than were seen last year also helped pull the rate down, Fitzner said. Food prices, particularly for chocolate and meat products, and the price of package holidays drove inflation down further.

“These were only partially offset by a further increase in petrol and diesel prices, and an uptick in the cost of clothing and footwear,” he said.

The Government has come under pressure for not doing more to mitigate higher energy costs in the U.K., a net energy importer, and for not fully exploiting remaining oil and gas reserves in the North Sea.

Chancellor Rachel Reeves is expected to announce sweeping reforms to give parliament authority to approve critical energy schemes, the Treasury said earlier in the day, Reuters reported.

The Government U-turned on proposals to cap rises on staples like bread, cheese, milk and eggs following outrage from large consumer brands.

Bank of England governor Andrew Bailey warned Labour that price caps on food are unsustainable amid fury over the Treasury's attempts to pressure supermarkets into imposing cost restrictions.

Retail bosses criticised the Treasury after reports that it had offered to ease packaging policies and delay rule changes on healthy food in return for keeping staple prices down.

Former Asda boss Lord Rose was among those who lashed out at the 'completely preposterous' and 'idiotic' proposals.

Bailey leaned into the row when he was quizzed by MPs on the Treasury Committee.

He said: 'If you start doing it as a matter of course, then effectively you're artificially moving prices relative to costs, and that's not a sustainable thing in the long run.'

The beleaguered Prime Minister finally had some good news to report yesterday as he hailed a “historic” trade deal with the Gulf states, marking the first such agreement among Group of Seven (G7) nations.

The trade deal could boost the U.K. economy by an estimated £3.7 billion ($4.9 billion) annually and increase wages by £1.9 billion annually in the long run, the U.K.’s Department for Business and Trade (DBT) said as the agreement was announced.

“The U.K. could see a boost to growth and higher wages for decades to come after becoming the first G7 country to secure a trade deal with the Gulf Cooperation Council (GCC) today, strengthening our economic partnership with the region, supporting jobs in the long term, and bolstering domestic resilience,” the DBT said in a statement.

The deal with the GCC, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, reflected the U.K.’s “solidarity and long-term cooperation with its Gulf partners,” according to the British government.

A spokesman said the deal will remove an estimated £580 million in duties a year, based on current U.K. exports to the GCC, once the agreement is fully implemented, with £360 million of this amount “to be removed on day one of the agreement entering into force. British exports of cereals, cheddar cheese, chocolate and butter are among the goods expected to become tariff-free under the terms of the deal.

There is currently little discernible pattern in Sterling's performance in the financial markets. Traders appear unable to make up their minds, given the constant stream of contradictory information they receive daily.

Not even interest rate policy is consistent, with inflation caused by the war in Iran “bumping up” against economic weakness that, according to Bailey, would have allowed the BoE to cut rates by now had inflation behaved as predicted before the conflict began.

The pound rallied to a high of 1.3463 yesterday and closed at 1.3434, but investors are reluctant to take a longer-term view as overnight developments constantly whipsaw the market.

A majority of Federal Reserve officials at their most recent meeting anticipated that interest rate increases would be necessary if the war in Iran continued to aggravate inflation, according to minutes released last evening. It was odd, given that three members of the FOMC wanted the meeting summary amended to provide a more balanced view of the possibility of rate increases, that the minutes reflected their exact concerns.

Though the Federal Open Market Committee again voted to keep its benchmark rate targeted at 3.5%-3.75%, the meeting featured four “no” votes, the most since 1992. It heightened disagreement about where policy should go.

While several meeting participants said it would be appropriate to lower rates when it’s clear that inflation is moving back to the Fed’s 2% target or when the labour market weakens, “A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2%.”

Three of the four “no” votes came from regional presidents who advocated that policymakers keep their options open for increases amid an inflation surge. The group agreed to keep the benchmark Fed Funds Rate steady but objected to the inclusion of language referring to “additional adjustments” to rates. The phrasing is widely believed to imply that the next move would be a cut.

The minutes noted that “many participants indicated that they would have preferred removing the language from the post-meeting statement that suggested an easing bias regarding the likely direction of the Committee’s future interest rate decisions.”

In Fed parlance, though, “many” does not constitute a majority, so the phrasing remained in the statement.

Officials broadly agreed that the ‘Iran effect’ would have “significant implications” for the Fed as it pursued its dual goals of full employment and stable prices. However, they debated how long the impact on inflation would last.

“The vast majority of participants noted an increased risk that inflation would take longer to return to the Committee’s 2% objective than they had previously expected,” the minutes stated.

The growth of artificial intelligence and its boost to the stock market mean the US economy has essentially become a heavy bet on the technology’s success, according to one of the country’s top investment bankers.

“If you look at the sources of growth in the US, it is artificial intelligence and high-income consumers,” Lazard Inc. Chief Executive Officer Peter Orszag said on Bloomberg TV. Those consumers, he added, are also benefiting from AI-driven growth in equities.

“At this point, the US economy is a levered bet on AI,” he said in the interview airing Wednesday. “Like many bets, it may or may not pay off, but it’s a good bet to be making.”

Unlike several “bubbles" in the past, like dot.com in the nineties, which had no discernible “result” for the economy, the growth of AI has been likened to a version of the industrial revolution in the 1800's UK, which transformed how factories worked.

It (AI) is being considered a bubble because it is a single avenue being exploited by investors, which makes any slowdown in overall investment dangerous.

As inflation moves further away from the Fed’s 2% target, it is making the new Fed Chair’s task more difficult. Kevin Warsh, who will be sworn in at the White House tomorrow, has been chameleon-like in his change from an inflation hawk when he was a member of the FOMC to an inflation dove now. Cynics, like Senator Elizabeth Warren, believe he is little more than a “sock puppet” controlled by President Trump.

The dollar index lost ground as the threat of an imminent attack on Iran faded. The index fell back to a low of 98.96 and closed at 99.14.

The centre of gravity within the ECB has clearly shifted towards a June hike, and the loudest voices are now leaning towards hawkish. Across the Governing Council, the “heavy hitters”, including Nagel, Wunsch, and others, are openly signalling that the conditions for tightening are being met, largely because energy-driven inflation is proving persistent and the Iran-related shock shows no sign of easing.

Pierre Wunsch, one of the ECB’s clearest hawks, told Bloomberg that a June hike is “quite likely” if the Iran conflict remains unresolved, explicitly linking the external shock to the policy response. Joachim Nagel has said a June move would be “appropriate” if the updated projections confirm the adverse inflation scenario.

Multiple Reuters-sourced reports say the case for a June hike is “nearly sealed”, with officials arguing the ECB must act to preserve credibility after signalling a move.

These are exactly the people markets watch most closely when gauging the ECB’s true bias, and they all point in the same direction.

Isabel Schnabel is not a Central Bank Governor, but she wields significant authority as a member of the ECB’s Board. She has taken a more neutral stance in her recent speeches, but a more hawkish tone will be seen as confirmation that rates will rise next month.

German government borrowing costs have climbed to their highest levels in 15 years as the energy shock triggered by the US-Iran war fuels inflation fears in the eurozone’s largest economy.

Germany’s 10-year Bund yields, the euro area benchmark, rose to 3.19% earlier in the week, while yields on 30-year German government debt hit 3.70%, the highest since 2011.

The surge in borrowing costs was part of a global bond selloff that had softened only slightly yesterday.

It also came amid growing expectations that the European Central Bank will hike interest rates at its next meeting in June to contain rising price pressures. The ECB has held rates at its two previous meetings since the US-Iran war’s onset in late February.

“This energy supply shock is more persistent, so we are moving away from our baseline scenario,” Joachim Nagel, the Bundesbank president, told Bloomberg Television. “It means maybe we have to do something.”

Fresh data has added to concerns. Germany’s Federal Statistical Office reported that producer prices rose 1.7% year-on-year in April, sharply up from -0.2% in March, driven mainly by higher energy, metals and fertiliser costs.

The data “confirms that a first inflation wave is in full swing”, said ING Research, warning that higher energy prices would soon spill over into transport and food costs.

The Middle East crisis comes at a time when Germany’s export-driven economy is already reeling from sweeping US tariffs, slowing Chinese demand, and the previous energy shock sparked by Russia’s full-scale invasion of Ukraine in 2022.

Economists, however, downplayed the likelihood that the war in Iran, which is now under a shaky ceasefire, will cause a price surge similar to the one that followed Moscow’s invasion, when inflation peaked at 10.6%.

The current price shock is hitting the German economy in a weaker state than in 2022; consumers' ability and willingness to pay higher prices are limited.

With no end to the conflict in sight, many analysts remain deeply concerned about the rise in global government borrowing costs. Many countries, particularly those in Europe, are already facing severe fiscal pressures.

“The worrying thing would be that with this base in yields formed, where would yields go if strikes resumed on Iran?” Jim Reid, Global Head of Macro at Deutsche Bank, wrote yesterday.

The Euro made tentative gains yesterday as the shadow of further conflict in Iran hung over the market. Traders in Frankfurt, Paris and Madrid have a different outlook to those in London and New York and tend to confine their expectations within the borders of the Eurozone. They are more driven by Eurozone inflation and interest rates than their colleagues in more “international” centres.

The common currency rose to a high of 1.1642 and closed at 1.1622.

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