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Inflation hit the UK’s two percent target for the first time in three years, cheering Prime Minister Rishi Sunak as he tries to turn around his struggling election campaign.
The figure means consumer price inflation fell to 2 percent ahead of the U.S. and euro zone, a milestone after the worst rise in inflation in a generation. The Bank of England last hit its two percent inflation target in July 2021.
The Office for National Statistics data on CPI growth in May was in line with the forecast of economists polled by Reuters and fell from April’s 2.3 percent pace, driven by lower prices for food and soft drinks, recreation and furniture.
However, the latest data showed a smaller decline in services inflation than economists had expected. It fell to 5.7 percent in May, compared with 5.9 percent earlier. Core inflation, which strips out food and energy, fell to 3.5 percent in May 2024, from 3.9 percent in April, but still elevated.
Sterling rose 0.15 percent to $1.2725 after the announcement.
“Headline inflation is on target, but the war on inflation is not yet won,” said Tomasz Wieladek, an economist at T Rowe Price. “The strong level of services inflation this morning suggests that inflation is not yet falling in a sustainable manner.”
Sunak, who called Britain’s July 4 election on the day the April figures were released, called the figures on LBC radio “very good news because the last two years have been really tough for everyone”. But his Conservative Party remains about 20 points behind opposition Labor in the polls.
The BoE’s monetary policy committee is due to set interest rates on Thursday, with analysts widely expected to keep the benchmark rate at its 16-year high of 5.25 percent.
Investors on Wednesday cut their bets on a first quarter-point rate cut at the BoE’s August meeting to one in three, from a 45 percent chance immediately before the inflation release.
While the first rate cut will remain fully priced in until November, traders now see a 75 percent chance of a second 0.25 percentage point rate cut this year, down from 95 percent when markets closed on Tuesday.
Market movements were driven by slow progress in reducing services inflation. The MPC is watching the gauge closely as a critical indicator of domestic price pressures as the global shocks that pushed up import prices fade.
Senior BoE officials have suggested that if services inflation eases in line with the central bank’s forecasts, they should be able to cut rates this year. But the May data was higher than the 5.5 percent forecast by analysts polled by Reuters, and rates of services and core inflation remain higher than equivalent figures in the euro zone.
The UK’s large services inflation in May was driven by strong growth in air fares, accommodation and transport. Rob Wood, UK economist at Pantheon Macroeconomics, said the continued strength of services inflation, along with strong wage growth, meant an August rate cut was “a long way off”.
May’s drop in headline CPI inflation to 2 percent may prove fleeting, economists warned, as downward pressure on energy prices receded. At its last meeting, the BoE forecast that CPI inflation would start to rise later this year, heading for 2.6 percent in the final quarter.
“We expect inflation to recover somewhat from June,” said Paula Bejarano Carbo, an economist at the National Institute for Economic and Social Research. “With today’s data suggesting that core inflation remains elevated, this recovery may be sharper than expected.”
The Conservatives and Labor tried to crunch the numbers during the campaign. “I know we’ve had a lot of shocks, inflation raising people’s bills,” Sunak said.
“But we stuck to the plan and took steps that weren’t always easy, but we got there. Inflation is back on target and that means people will start to feel the benefits and ease some of the burden on the cost of living.”
Rachel Reeves, Labour’s shadow chancellor, said the lower headline inflation figure was welcome but households were still struggling. The overall price level remains 20 percent higher than this time in 2021, when inflation was starting to rise.
“Unlike Tory ministers, I’m not going to say all is well and the cost of living crisis is over because I know the pressures on family finances are still acute,” she told BBC Radio 4’s. Today program.
More news from Lucy Fisher and Jim Pickard in London