UK inflation falls to Bank of England’s 2% target for first time in almost three years

UK inflation has fallen to 2% – raising the possibility of an interest rate cut within months.

This consumer price index (CPI) The Office for National Statistics (ONS) confirmed on Wednesday that the growth rate for the year to May.

The chart shows prices are still rising, but at the slowest pace since July 2021.

The ONS said the fall was mainly due to a fall in food prices, while motor fuel costs rose slightly.

The officials added that core inflation, which excludes volatile factors such as food and energy, fell to 3.5% in May, in line with expectations.

However, some commentators expressed concerns that services inflation, which includes sectors such as hospitality, fell only from 5.9% in April to 5.7% in May.

Financial markets had previously priced in an interest rate cut in August, but expectations changed on Wednesday, with the cut coming in September.

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

This Bank of England is set to announce its latest interest rate decision on Thursday.

The bank has been steadily raising interest rates since December 2021 as part of efforts to bring down inflation, which has risen sharply in the wake of Covid pandemic and among War in Ukraine – to the target of 2%.

Most analysts expect interest rates to remain maintained at 5.25% for the seventh consecutive time this week, amid concerns that inflation could rise again in the second half of the year.

The prospects for an interest rate cut this week were also dampened last month as wage growth – a driver of inflation – came higher than expected.

Inflation fell to 2.3% in AprilAlthough the fall was not as big as economists and the Bank of England had predicted.

Today’s inflation data and Thursday’s interest rate decision will likely be the last major economic announcements before general elections in the next month.

“Is the interest rate cut ready?”

Martin Sartorius, chief economist at the Confederation of British Industry, said the fall in inflation would be “good news for households”, although he added that many were still feeling the effects of the crisis.

He added: “Today’s data provides grounds for the Monetary Policy Committee (the Bank) to cut interest rates in August, in line with the expectations contained in our latest forecast.

“However, policymakers will still need to consider the decline in core inflation against the backdrop of signals that domestic price pressures, such as rapid wage growth, are slowly easing.

“This means they are likely to proceed cautiously beyond August to avoid putting further upward pressure on inflation, especially as the country’s growth outlook improves and geopolitical tensions remain high.”

Concerns about service inflation

Ruth Gregory of research firm Capital Economics said Wednesday’s data would “probably not be enough” to persuade the Bank to cut rates on Thursday.

She added: “And services inflation is falling only modestly, which makes our forecast that the Bank will cut interest rates for the first time in August look somewhat uncertain.”

Rob Wood of Pantheon Macroeconomics admitted there is a risk that Bank of America’s first interest rate cut this year could be pushed back to September.

He said: “The bad news is that services inflation has proven remarkably persistent, falling only to 5.7% in May from 6.1% in February, a period when large base effects should have a big impact on the annual inflation rate.

“We will have to carefully analyze all the detailed data.”

Meanwhile, UniteBank of England Secretary General Sharon Graham has called on the Bank to cut interest rates faster.

She said: “Falling inflation does not mean falling prices. The worst cost of living crisis it still continues across generations.

“We need action from the Bank of England on Thursday to start cutting interest rates and ease the pressure on struggling homeowners.”

Parties argue over numbers

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

He said: “When I became prime minister, inflation was 11 per cent. But we took bold action. We stuck to a clear plan and that is why the economy is now on the right track.”

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

Rachel Reeves, Labour’s shadow chancellor of the exchequer, said: “After 14 years of economic chaos under the Conservative government, the situation for working people has worsened.

“Shop prices are up, mortgage bills are higher and taxes are at their highest in 70 years.”

Liberal Democrat Treasury spokeswoman Sarah Olney said: “The hard truth is that millions of people will not feel better today.”