UK hits inflation target: In May, British inflation hit its 2 per cent goal for the first time in nearly three years, according to recent data. Although this decline in headline inflation is positive news for both Prime Minister Rishi Sunak and the Bank of England (BoE), it may not be sufficient to significantly impact Sunak’s political prospects in next month’s election or prompt an immediate rate cut by the BoE.
Services inflation moderates slightly
The data revealed that services price inflation, which the BoE views as a more accurate indicator of medium-term inflation risks, was 5.7 per cent. This figure decreased from 5.9 per cent in April, although it did not drop as much as the anticipated 5.5 per cent.
Following the release of the data, the British Pound saw a slight increase against the US Dollar.
“Monetary policymakers will need to consider the decline in headline inflation alongside the persistent domestic price pressures, such as strong wage growth, which are not decreasing as quickly as expected,” said Martin Sartorius, principal economist at the Confederation of British Industry. He suggested that a rate cut might occur in August.
CPI inflation decline noted
The annual consumer price inflation dropped from 2.3 per cent in April, aligning with the median expectation in a Reuters poll. This decrease represents a significant drop from the 41-year high of 11.1 per cent in October 2022.
This decline in inflation has been more pronounced in the UK compared to the euro zone and the United States, where inflation rates were 2.6 per cent and 3.3 per cent respectively in May. This counters previous concerns about particularly stubborn inflation in the UK.
Despite the recent fall, consumer prices in the UK have increased by about 20 per cent over the past three years, negatively impacting living standards and contributing to the unpopularity of Sunak’s Conservative Party, which trails the opposition Labour Party by about 20 points in polls.
BoE rate cut projections
The BoE has indicated that merely achieving the inflation target does not justify an immediate rate cut.
Most economists polled by Reuters anticipate that the BoE will start reducing rates from the current 5.25 per cent rate in August. However, financial markets suggest that a rate cut is more likely to occur in September or October, with only a 10 per cent probability of a cut this week.
The recent decline in inflation has been largely attributed to a reduction in regulated household energy bills in April, the effects of which are expected to diminish later in the year, with forecasts predicting a rise in inflation once again.
(With Reuters Inputs)
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