UK inflation fell below the Bank of England’s 2% target for the first time in nearly three years | Business newspaper

Commentators say the decline in the rate of price growth makes interest rate cuts more likely in the coming months – but there is uncertainty about exactly when that might happen.

Inflation in the UK has eased to 2%, raising the prospect of interest rate cuts within months.

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

This figure shows that prices are still rising, but at the slowest rate since July 2021.

The ONS said the drop was largely due to falling food prices, while fuel costs rose slightly.

Officials added that core inflation, which strips out volatile items 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 hospitality – only eased from 5.9% in April to 5.7% in May.

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

It also comes before Bank of Englandlast Thursday’s decision on interest rates.

The Bank has been steadily raising rates since December 2021 as part of efforts to reduce inflation – which has risen sharply as a result of The covid pandemic and in the middle war in Ukraine – to its target of 2%.

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

But today’s inflation figure makes it more likely that there will be a cut in August, commentators say.

Inflation in April it fell to 2.3%.although the drop was not as large as economists and the Bank of England had predicted.

The prospect of a rate cut this week took a hit last month when wage growth – the driver of inflation – came higher than expected.

Today’s inflation data and Thursday’s interest rate decision are likely to be the last major economic statements to be made a year ahead general election next month.

‘Stage set’ for rate reduction

Martin Sartorius, chief economist at the Confederation of British Industry, said the drop in inflation would be “welcome news for households”, although he said many were still feeling the squeeze.

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

“However, ratemakers will still need to consider a decline in headline inflation, with signs that domestic price pressures such as increased wage growth are slowing.

“This means they are likely to tread carefully after August to avoid further upward pressure on inflation, especially as the growth outlook at home improves and geopolitical tensions remain elevated.”

Concerns about service inflation

Ruth Gregory of research firm Capital Economics said Wednesday’s numbers “probably won’t be enough” to convince the bank to cut rates on Thursday.

She added: “And with services inflation coming down only slightly, our forecast that the Bank will cut rates for the first time in August will look a little more uncertain.”

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

He said: “The bad news is that services inflation has proved remarkably persistent, slowing to just 5.7% in May from 6.1% in February, a period when the year-on-year rate of inflation should have been hit hard by the major benchmarks.

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

Meantime, UniteChief secretary Sharon Graham urged the bank to cut rates earlier.

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

“We need the Bank of England to step in on Thursday to start cutting interest rates and ease the pressure on hard-pressed home owners.”

Parties clash over characters

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

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 with Labor at risk.”

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

“Shop prices are up, mortgage bills are higher and taxes are at a 70-year high.”

Lib Dem Treasury spokeswoman Sarah Olney said: “The hard truth is that millions of people are not going to feel any better today.”