Inflation is back at the Bank of England’s (BoE) target for the first time in almost three years.
According to the Office for National Statistics, the rate of inflation fell to 2% in May, a drop of 30 basis points from the previous month.
Core inflation, which strips out volatile elements such as food and energy, fell to 3.5% in May. However, underlying cost of living pressures remain, with food prices still about 25% higher than at the start of 2022.
The decline in cost pressure over the course of this year follows a period of sustained pressure which saw inflation hit a peak of 11.1% in October 2022 on the back of the Covid pandemic and Russia’s invasion of Ukraine.
The BoE embarked on a series of rate hikes in a bid to curb inflation. After 14 successive increases, lifting the base rate to 5.25% last August, the Bank paused this hawkish stance on signs that inflationary pressures were reducing.
The easing in the headline inflation rate in May, which had been forecast, was driven by a slowdown in price rises for food and soft drinks, recreation and culture, and furniture and household goods.
The reading increases expectation that the Bank of England could cut interest rates at its monthly meeting on Thursday.
It also comes as a boost to prime minister Rishi Sunak ahead of the 4 July election.
Abrdn deputy chief economist Luke Bartholomew is not expecting a rate cut, however, saying that there is still evidence of ‘residual stickiness’ in services inflation, reflecting the strength of wage growth recently.
‘We think the Bank’s communication tomorrow will set out a path for a cut in August, which is now looking increasingly likely,’ Bartholomew said.
Deutsche Bank Research chief UK economist Sanjay Raja also believes the surprising 5.7% services inflation is likely to prevent a significant easing in rate policy.
‘What matters now is how much stock the MPC puts on the spot – and arguably backward-looking – data,’ Raja said.
‘Indeed, survey data has been more encouraging of late. For now, markets have pared back rate-cut bets this year, suggesting a stickier Bank rate path through the coming months.’
