Inflation in the UK falls to the Bank of England’s 2% target

Inflation has fallen to the Bank of England's two percent target for the first time in nearly three years, raising the prospect of a rate cut this summer.

Figures from the Office for National Statistics show that the consumer price index (CPI) fell to 2% in May, from 2.3% in April. On a monthly basis, inflation remained constant, compared to a rise of 0.3% last month.

The figure shows that prices are still rising, but at the slowest pace since July 2021. It follows a sustained period of high inflation in the UK, which peaked at 11.1% in October 2022 – the highest level since 1981.

Core inflation, which excludes the costs of food, energy, alcohol and tobacco due to their tendency to be volatile, is also expected to have fallen from 3.9% to 3.5%, as expected.

The Bank of England will look at these figures on Thursday to decide on further interest rate measures.

The decline in the inflation rate is due to a slowdown in price increases for food and non-alcoholic beverages, leisure and culture, and furniture and household goods.

Food and non-alcoholic beverage prices rose 1.7% in the year to May, up from 2.9% in April, reaching their lowest level since October 2021.

Read more: Interest rates will remain high for a while longer, say analysts at BlackRock

It has been declining for 14 months since peaking at 19.2% in March last year, the highest annual rate in more than 45 years.

The biggest dampening effects on the inflation rate were on bread and cereals, vegetables, and sugar, jam, syrup, chocolate and confectionery. In all of these categories, prices fell between April and May this year, compared to a monthly increase a year ago.

However, services sector inflation, a key indicator closely watched by the Bank of England, fell slightly short of analysts' expectations, coming in at 5.7 percent year-on-year, compared to the market's expectation of 5.5 percent.

Thomas Pugh, economist at RSM UK, said of services inflation: “This will raise concerns at the MPC that underlying price pressures in the economy are not easing as quickly as expected, making a rate cut in August less likely.”

The story continues

“However, we do not rule out a rate cut in August. It is likely that services inflation in May was still supported by the impact of the 9.7 percent increase in the national minimum wage in April, which was a one-off, as inflation in the restaurants and hotels category only eased by 0.2 percentage points.

“We expect inflation to fall below 2% in June, laying the foundation for a rate cut by the MPC in August.”

“Inflation is likely to average just above 2% for the rest of the year, giving the bank plenty of room to cut rates. Our base case continues to assume rates will end the year at 4.5%, but the risks have clearly shifted to fewer rate cuts this year.”

The Confederation of British Industry (CBI) said the stage was now set for a cautious interest rate cut by the Bank of England.

Martin Sartorius, chief economist at the CBI, said: “A further decline in inflation in May will be welcome news for households as we move towards a more favourable inflation environment. However, many will still be suffering the impact of significantly higher price levels than in previous years, particularly for food and energy costs.”

“Today's data sets the stage for a rate cut by the Monetary Policy Committee in August, in line with expectations in our latest forecast.”

The bank's monetary policy committee meets on Thursday and, with elections looming, it is almost certain that the interest rate will be left at 5.25% so as not to influence the political outcome.

The slowdown in inflation is likely to be welcomed by homeowners and buyers who are pinning their hopes on a rate cut in the summer.

“Mortgage rates have fluctuated significantly over the course of the year as financial expectations have changed, causing headaches for nervous first-time buyers looking to enter the property market and existing homeowners hoping to get better deals when remortgaging,” said Alice Haine, financial analyst at Bestinvest.

Read more: UK interest rates expected to remain unchanged ahead of general election

“While easing inflation combined with solid wage growth means affordability is improving for buyers as their money now goes a little further, a rate cut could boost their prospects even further. House prices have stagnated in recent weeks as uncertainty over the timing of a rate cut and the impact a new government could have on the market causes some buyers and owners to postpone their relocation plans,” she added.

Regard: What is inflation and why is it important?

Download the Yahoo Finance app, available for Apple And Android.