Shoppers on the high street in Kingston, London, UK
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Inflation in the United Kingdom fell to the Bank of England’s target of 2.0% in May, the Office for National Statistics said on Wednesday in the latest edition of the key economic indicator before national elections in July.
The total fell from 2.3% in April, matching the 2% expectations of economists polled by Reuters.
Sterling rose slightly shortly after the release, trading at $1.2721 at 7:33 a.m. London time.
Services inflation – which is closely watched by the Bank of England due to its dominance within the UK economy and its reflection of domestically driven price increases – was 5.7% in May, down from 5.9% the previous month.
Core inflation, excluding energy, food, alcohol and tobacco, fell to 3.5% from 3.9% in April.
Falling food prices contributed most to the declines, while car fuel costs continued to face upward pressure, the ONS said.
Unusually bad weather led to the slowest increase in food sales in two years, new figures from British market research firm Kantar showed on Tuesday. Food sales rose 1.0% in the four weeks ended June 9, marking the 16th consecutive monthly decline in food inflation, according to the index.
Bank of England decision in focus
While the latest release brings inflation in line with the BOE’s target, Azad Zangana, senior European economist and strategist at Schroders, warned that upward pressure could return in the second half of the year as the UK lets its energy price cap expire.
“There may be a bit more upward pressure from the third and fourth quarters onwards, as the Bank of England has warned,” he told CNBC’s “Squawk Box.”
Zangana suggested the bank could even “surprise” the market this week with a rate cut at its next meeting on Thursday. Otherwise, the bank is widely expected to keep rates steady at 5.25%, where they have been since August 2023 – back when inflation was around 7.9%.
However, as inflation approaches target, markets are now pricing in a short-term decline. All but two of the 65 economists surveyed by Reuters last week said they expect a rate cut in August, while financial markets are pricing in such a cut in September.
Melanie Baker, senior economist at Royal London Asset Management, agreed that a rate cut in August was likely, but added that upcoming data prints should show that inflation has fallen sustainably.
“The consumer price index for services around the 6% mark, in my view, continues to appear inconsistent with confidence in sustainably achieving the 2% inflation target,” she said in a note.
The economic performance comes as the UK prepares for its general election on July 4th. Polls point to a landslide victory for the opposition Labor Party.
British Prime Minister Rishi Sunak called the latest paper “great news” in a post on social media platform X, adding that inflation was now “back to normal.”
Opposition politician Rachel Reeves admitted that while inflation was rising more slowly, “the cost of living crisis is still acute for many families”.
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2024-06-19 09:32:22
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