Shoppers on the High Street in the Kingston district of London, England
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UK inflation fell to the Bank of England’s target of 2.0% in May, the Office for National Statistics said on Wednesday, the last gauge of key economic activity ahead of national elections in July.
The headline reading fell from 2.3% in April and came in line with expectations of 2% among economists polled by Reuters.
Sterling rose slightly after the release, trading at $1.2721 at 7:33 a.m. London time.
Services inflation – closely watched by the BOE given its dominance of the UK economy and a reflection of domestically generated price rises – was 5.7% in May, up from 5.9% in the previous month.
Core inflation, excluding energy, food, alcohol and tobacco, eased to 3.5% from 3.9% in April.
Food prices were the largest contributor to the fall, while car fuel prices continued to see upward pressure, the ONS said.
Unseasonably bad weather led to the slowest increase in grocery sales in two years, new figures from UK market research firm Kantar showed on Tuesday. Sales of groceries rose 1.0% in the four weeks to June 9, marking the sixteenth straight month of declines in food inflation, according to the index.
While the latest print brings inflation in line with the BOE’s target, Asad Jangana, senior European economist and strategist at Schroders, warned that upward pressure could return in the second half of the year when the UK lowers its energy price ceiling.
“From the third, fourth quarter, you may start to see a little bit more upward pressure as the Bank of England has warned,” he told CNBC’s “Squawk Box.”
Zangana suggested the bank could “surprise” the market with a rate cut this week when it meets next Thursday. The bank is widely expected to keep rates steady at 5.25% otherwise, with inflation at 7.9% from August 2023.
Nevertheless, markets are now bearish as inflation is now approaching the target. All but two of the 65 Economists polled by Reuters It said last week it expects an interest rate cut in August, while financial markets are pricing in such a cut in September.
As the United Kingdom prepares for a general election on July 4, opinion polls suggest a landslide victory for the opposition Labor Party.
UK Prime Minister Rishi Sunak called the latest print “great news”. Post on X social media siteAdding that inflation is now “back to normal”.
Opposition politician Rachel Reeves admitted that while inflation was growing at a slower rate, “the cost of living crisis remains acute” for many families.
