# UK inflation hawks are still chasing unicorns

_UK inflation has surprised to the downside, gilt spreads have compressed, and Rachel Reeves' food price intervention collapsed within 24 hours. Neil Woodford on why the MPC hawks are wrong and why deflation, not inflation, is the medium-term story._

Neil Woodford · 21 May 2026 · 7 min read

![SpaceX is seeking to raise at least $75 billion in the IPO at a valuation of as much as $2 trillion, though the final targets won’t be disclosed for several weeks.](https://cdn.sanity.io/images/v3acfbvo/production/b8d869f1cfaec384b3d697d9d56599a5f8d65193-5408x3600.jpg?w=1600&fit=max&auto=format)

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This has felt like an odd week to me. The oil price has fallen a bit, equity markets are up a bit, bond markets similarly and geopolitics a little quiet after last week's Xi/Trump get together in Beijing. Odd because the news from the Persian Gulf has not been particularly good given the pretty bellicose rhetoric from both sides who, on the face of it, remain far apart. One might have felt that another week of stalemate might have resulted in weaker financial markets given the dire warnings of impending economic disaster that so many are confident is about to descend on the world economy. Perhaps, investors around the world are daring to believe that the world economy is adapting slightly better to the energy crisis than had been expected. Certainly the macro news from the UK and from Canada this week suggests that the inflationary consequences of the oil price 'shock' are not as severe as consensus believed.

Here in the UK, CPI and core inflation fell significantly more than expected in April which led to a tightening in the yield premium over treasuries across the yield curve. In fact, days after yet more stories appeared in the UK financial media about a crisis in the gilt market, the yield premium over the equivalent treasury at 30-year maturities has fallen to 49bps (it was about 60bps last week) and at the ten-year maturity, the premium is now down to 34bps. That's been hovering around 50bps since last year. In other words, once again, the hysteria in the media about a buyers' strike, or widening political risk being priced into UK government bonds is a figment of the authors' fevered imaginations and not something detectable in the pricing of UK government debt.

In the US, Nvidia's results, although very good, didn't excite the market which was seemingly more interested in the news that SpaceX was floating next month at a valuation of $1.75trn and that both Anthropic and OpenAI would be following suit, with OpenAI announcing as soon as Friday. I have to say this reaction to very good results did surprise me. Nvidia posted better than expected adjusted earnings for Q1 on better than expected revenues. The statement was appropriately bullish, Jensen Huang announced an $80bn buyback and increased the dividend by a noteworthy 2400%. The guidance for Q2 was also apparently above consensus too. So why the disappointment? I think the answer may be a product of two factors. One is simply a product of size. Nvidia is a $5.3trn beast and growing fast when you are that big is not easy. The other factor may well be that some of Nvidia's customers, Alphabet and Amazon most notably, have developed their own chips for training and inference which will compete directly with Nvidia's chips, and Intel, AMD and Broadcom have all upped their game too. Despite ongoing enthusiasm about AI infrastructure investment by the hyperscalers and the fact that other businesses and governments would soon become large customers according to the CEO, investors may just be tempering their enthusiasm because growth will be harder to deliver in the future.

## UK politics

The Labour party's leadership omnishambles took a few more turns this week. Fortunately, much of the political theatre which so preoccupies the media is of limited consequence to financial markets, but I should mention a couple of points that I thought were relevant.

The first concerns the Chancellor, Rachel Reeves and so is not directly linked to the current leadership issue. On Wednesday, she announced that she would be approaching the food retailers to ask/instruct them to limit what they charge on about 20 basic items (eggs, milk, bread etc) in return for relaxing various regulatory burdens (if they are that unimportant just get rid of them anyway) with the objective of helping working families cope with the inflation unleashed by the war with Iran. This crazy idea rightly did not survive contact with the real world for more than 24 hours. Appropriately, Stephen Bush from the FT described the initiative as 'mind-boggling stupid' which probably flatters it. This sort of interventionist tokenism from someone that should know better betrayed a complete lack of understanding of a market economy, supermarket business models and basic economics. But probably even worse, it also displayed the Chancellor's and the Treasury's total ignorance of what's been happening to food prices in the UK. In fact, there has been no food price inflation in 2026 (to the end of April). The food price index reached 143.6 in December 2025 and in April the index had actually fallen very marginally to 143.5. In line with this, YOY, food price inflation has also been falling through 2026 and in the latest ONS release stood at 3% in April.

Indeed, so stupid was this daft notion that the governor of the Bank of England felt sufficiently moved to comment on it at the Treasury Select Committee meeting this week. There he said that freezing the price of essentials would be unsustainable and risked backfiring. Moderate banker speak for you have got to be joking.

The second issue concerns a package of other measures announced over the last two days. At PMQs this week, the PM announced that fuel duty will be frozen until the end of the year. (It had previously announced a phasing in of the 5p cut that the Tories introduced in March 2022 over a six-month period starting in September.) At the margin this will be modestly helpful for headline inflation as will a raft of other announcements the Chancellor announced today including a temporary cut in VAT on summer attractions including theme parks, zoos and museums. Albeit helpful at relatively low cost, what would have been much better would have been to freeze the energy price cap until October. That would have cost a little over £1.5bn but would have saved considerably more by reducing the September indexation of pensions and welfare payments and reduced the coupon on index linked gilts.

## UK inflation

I didn't want to walk past the opportunity to highlight the surprisingly good inflation data that the ONS released this week. The headline CPI fell considerably more than consensus expected from 3.2% to 2.8% and underlying core inflation fell dramatically from 3.1% to 2.5%. Apart from the positive impact these data had on the UK gilt market they should also capture the attention of the nine members of the MPC. The highest profile hawks on the committee including Catherine Mann and the chief economist Huw Pill, who voted to increase interest rates at the last meeting, in particular should take note.

The second round (inflationary) effects these academic economists have repeatedly talked about following increases in energy prices, such as companies raising prices to protect margins or workers demanding inflationary wage increases are rather like unicorns, things people know about, but no one has ever seen, certainly not in this economic environment.

Indeed, the evidence in the UK labour market continues to point towards falling wage pressures with wage settlements in the private sector now dipping below 3%. It is a stretch to imagine that the MPC will vote for a cut in rates anytime soon (which is what they should do). But I am now increasingly confident that the committee will not compound their recent mistakes by not cutting rates more aggressively by voting to increase them this year. For me rates are now on hold until there is some resolution in the war with Iran, and then rates can resume on their downward path to 3% and below.

## Deflation

Finally, I just wanted to highlight again, whilst policy makers and central bankers are totally preoccupied by inflation, that the near and medium term future for the global economy, in my opinion, is one that will be characterised by prolonged deflation. Once the war in the Persian Gulf is resolved and the world's oil and gas industry has returned to a more normal operating environment, I expect supply to grow significantly as countries like the UAE, Mexico, Canada, Venezuela, Norway and possibly Russia and Iran all increase production against a backdrop of stable or even falling demand. In other words, I expect energy prices to fall significantly. Meanwhile, China will continue to export goods price deflation to the world as it continues to build industrial capacity across a range of different industries and continues to suppress its currency. Finally, AI and robotics are set to become the most deflationary forces modern economies have ever had to confront. As Jensen Huang said yesterday, 'demand has gone parabolic' and the reason is simple, 'agentic AI has arrived'. Service industries around the world will substitute skilled and unskilled human capital with AI and robotics and it's already happening. The terminology may feel uncomfortable as the CEO of Standard Chartered discovered this week, but the reality is undeniable.

How this will all play out is not yet clear and there are obvious upsides and downsides. Massive increases in productivity and the ability of economies to survive and prosper against a backdrop of huge falls in population are two positives that policy makers should not lose sight of. But, in the near term perhaps the most significant economic impact of these three profoundly important economic forces will be very low inflation, possibly even deflation, and very low interest rates.

## What to look out for next week

Tomorrow the US releases some important labour market data which the new Fed governor should find interesting. Next week on Thursday there are a whole load of releases on the labour market, inflation and GDP which will also keep financial markets occupied. It's a quiet week for UK data aside from retail sales figures on Friday. On both sides of the Atlantic corporate results will not be a major feature but I suspect a lot of attention will be paid to OpenAI's IPO decision which is rumoured to be announced tomorrow.