European markets and Wall Street slumped on Wednesday after US inflation rose to a fresh 40-year high, mounting pressure on the Federal Reserve to reign in prices.
Gross domestic product (GDP) expanded 0.5% from April when output declined 0.3%, according to the Office for National Statistics (ONS). Economists polled by Reuters had predicted the economy to stagnate.
The rise was driven by a bounce in public sector output, resilience in construction and recovery in industrial supply.
Health was the main contributor, with services output up 0.4% as human health and social work activities grew by 2.1%, the ONS said.
Danni Hewson, financial analyst at AJ Bell, said: "After all the doom and gloom about the state of the British economy May’s growth figures might have some people wondering what all the fuss has been about.
"A slight uptick had been anticipated, but at 0.5% the pace of growth has caught many by surprise.
"These figures represent just one month – albeit a crucial one because it means the quarter as a whole doesn’t meet the criteria for negative growth – but one month can never tell the whole story.
“There are headwinds that are impossible to ignore. Retailers, hospitality venues, gyms, museums and children’s play centres are all feeling the weight of high inflation.
"Households are strategically cutting back on their spending, which is a particular blow to the consumer services which still haven’t been able to get anywhere near their pre-pandemic glory days."
The dollar rose on the back of the US inflation report, causing the euro (EURUSD=X) to break below parity at $1.002 after falling to parity for the first time in 20 years on Tuesday.
Across the Atlantic, US benchmarks were in the red as recession fears in the world's largest economy mount after inflation topped economists expectations again.
The consumer price index jumped to 9.1% in June, well ahead of the 8.8% forecast. The inflation surge marks the biggest rise since the end of 1981.
Core CPI, which outstrips volatile food and energy prices, came in 5.9% higher, down slightly from last month but still ahead of predictions.
The Federal Reserve faces the uphill battle of wrestling inflation under control and raising rates without pushing the economy into a recession. Markets were betting on a 75 basis point lift, but hotter-than expected figures could force the central to go further.
The data comes as the International Monetary Fund (IMF) cut its growth forecast for the American economy to 2.3% and warned of the threat of surging inflation.
Asian markets eked out modest gains despite the downturn on Wall Street but closed mixed overnight.
Watch: How does inflation affect interest rates?