UK inflation drops to Bank of England’s 2% target for first time in nearly three years | Business News

UK inflation has eased to 2% – increasing the prospect of an interest rate cut within months.

The consumer prices index (CPI) rate for the year to May was confirmed by the Office for National Statistics (ONS) on Wednesday.

The figure indicates that prices are still rising, but at the slowest pace since July 2021.

The ONS said the drop was largely down to falling food prices, while the cost of motor fuel rose slightly.

Officials added that core inflation, which strips out volatile elements such as food and energy, fell to 3.5% in May, in line with expectations.

However, some commentators expressed concern that services inflation – which covers sectors such as the hospitality industry – had only fallen from 5.9% in April to 5.7% in May.

Financial markets had previously priced in expectations of an interest rate cut in August – but on Wednesday that shifted towards a reduction being made in September instead.

The latest figures come following a sustained period of high inflation in the UK, which peaked at 11.1% in October 2022 – the highest level since 1981.

The Bank of England is due to announce its latest decision on interest rates on Thursday.

The Bank has been steadily increasing rates since December 2021 as part of efforts to bring down inflation – which soared in the wake of the COVID pandemic and amid the war in Ukraine – to its target of 2%.

Most analysts expect rates to be held at 5.25% for the seventh time in a row this week, amid concerns that inflation could tick up again during the second half of the year.

The prospects of a rate cut this week were also dealt a blow last month when wage growth – a driver of inflation – came in higher than expected.

Inflation eased to 2.3% in April, although the fall was not as big as economists and the Bank of England had forecast.

Today’s inflation figures and Thursday’s interest rate decision are likely to be the final major economic announcements to be made before the general election next month.

‘Stage set’ for rate cut?

The Confederation of British Industry’s principal economist Martin Sartorius said the fall in inflation would be “welcome news to households” although he said many were still feeling the pinch.

He added: “Today’s data sets the stage for the [Bank’s] Monetary Policy Committee to cut interest rates in August, in line with our latest forecast’s expectations.

“However, rate-setters will still need to weigh the fall in headline inflation against signs that domestic price pressures, such as elevated pay growth, are proving slower to come down.

“This means that they are likely to move cautiously beyond August to avoid putting further upward pressure on inflation, especially as the growth outlook improves at home and geopolitical tensions remain heightened.”

Services inflation concern

Ruth Gregory, from research firm Capital Economics, said Wednesday’s figures “probably won’t be enough” to persuade the Bank to cut rates on Thursday.

She added: “And with services inflation nudging down only slightly, this leaves our forecast that the Bank will cut rates for the first time in August looking a little shakier.”

Rob Wood, from Pantheon Macroeconomics, agreed there was a risk that the Bank’s first rate cut of the year could now be delayed until September.

He said: “The bad news is services inflation has proved remarkably persistent, slowing only to 5.7% in May from 6.1% in February, a period when large base effects should have weighed heavily on the year-over-year inflation rate.

“We’ll need to take a careful look at all the detailed data”.

Meanwhile, Unite‘s general secretary Sharon Graham called on the Bank to cut rates sooner.

She said: “Falling inflation doesn’t mean falling prices. The worst cost of living crisis in generations is still dragging on.

“We need action from the Bank of England on Thursday to begin lowering interest rates and relieve the pressure on hard-pressed homeowners.”

Parties clash over figures

Rishi Sunak described the fall in inflation as “great news” in a video posted on social media.

He said: “When I became prime minister, inflation was at 11%. But we took bold action. We stuck to a clear plan and that’s why the economy has now turned a corner.

“So, let’s not put all that progress at risk with Labour.”

Labour’s shadow chancellor Rachel Reeves said: “After 14 years of economic chaos under the Conservatives, working people are worse off.

“Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.”

Liberal Democrat Treasury spokeswoman Sarah Olney said: “The hard truth is that millions of people won’t be feeling any better off today.”