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UK inflation hits Bank of England’s 2% target in May

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Inflation has hit the UK’s 2 per cent target for the first time in three years, delivering a fillip to Prime Minister Rishi Sunak as he seeks to turn around his struggling election campaign.

The figure marks a milestone for the UK economy after the worst inflationary upsurge in a generation. The Bank of England last hit its 2 per cent inflation target in July 2021.

The Office for National Statistics data, which was in line with forecasts by economists polled by Reuters, means that headline inflation in the UK is now below that of the US and Eurozone.

But higher than expected rises in prices for services led investors to dial back bets on interest rate cuts, leading to small rises in both sterling and bond yields.

The futures market now suggests the probability of a quarter-point rate cut by August is roughly a third, down from 45 per cent just before the data was published.

“Headline inflation is at target, but the war on inflation isn’t won yet,” said Tomasz Wieladek, an economist at T Rowe Price. He added that price rises for services indicated that “inflation is not yet coming down in a sustainable fashion”.

May’s figure for consumer price inflation was down from April’s rate of 2.3 per cent, as price rises slowed for products such as food and non-alcoholic beverages and furniture.

Sunak, who announced Britain’s July 4 election on the day the April figures were published, hailed Wednesday’s numbers as “very good news”.

He argued that the Tories, who trail the opposition Labour party in the polls by about 20 points, had restored economic stability and could cut taxes as a result.

However, services and core inflation remain higher than in the Eurozone and the BoE’s Monetary Policy Committee is widely expected this Thursday to keep rates on hold at their 16-year high of 5.25 per cent.

Services inflation dropped to 5.7 per cent in May, down from 5.9 per cent a month before but above the Reuters poll forecast of 5.5 per cent, as prices rose for airfares and accommodation.

Rob Wood, UK economist at Pantheon Macroeconomics, said the persistent strength of services inflation, coupled with strong wage growth, meant an August rate cut was a “long shot”. 

Core inflation, which strips out food and energy, fell to 3.5 per cent in May, down from 3.9 per cent in April but still relatively high.

Economists also warned that the drop in headline CPI inflation might prove fleeting, as the impact of falling energy prices wears off.

At its most recent meeting, the BoE predicted CPI inflation would rise again later this year, heading towards 2.6 per cent in the final quarter. 

“We expect to see inflation rebound somewhat from June onwards,” said Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research. “Given that today’s data indicate that core inflation remains elevated, this rebound might be sharper than projected.”

The Conservatives and Labour sparred over the figures. “I know that we’ve had lots of shocks, inflation putting up people’s bills,” said Sunak.

“But we’ve stuck to a plan, taking action that wasn’t always easy but we got there,” he added. “Inflation is back to target and that means people will start to feel the benefits and ease some of the burdens on the cost of living.”

Rachel Reeves, Labour’s shadow chancellor, said the lower headline inflation figure was welcome, but that households were still struggling. Prices are 20 per cent higher than in 2021, when inflation was beginning to take off, she added.

Additional reporting by Lucy Fisher and Jim Pickard in London



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2024-06-19 13:43:45

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