Inflation in the UK has fallen to the Bank of England’s target rate of 2% for the first time in nearly three years. The Office for National Statistics reported that the Consumer Prices Index (CPI) decreased to 2% in the year to May. This is down from 2.3% the previous month. This drop was largely driven by a significant decrease in food prices.
This decline means that prices are rising at a much slower rate than they have over the past few years during the cost-of-living crisis. It marks the first time since July 2021 that inflation has hit the Bank of England’s target. This follows a period in which inflation soared to levels not seen in 40 years.
Prime Minister Rishi Sunak was quick to declare victory on inflation last month. This is despite predictions that it would fall sharply as rising energy and food costs subsided. Sunak took credit for the decrease, claiming that it was further evidence that the “economy has now turned a corner.”
Services price inflation, which the Bank of England considers a better indicator of medium-term inflation risk, fell by 0.2% to 5.7%. However, this was still above the 5.5% expected by economists.
Despite this decline, very few economists believe the Bank of England will reduce its main interest rate from 5.25% on Thursday. Many policymakers are concerned about the persistent inflation in the services sector and the rate at which wages are increasing, which could raise the risk of an inflation rebound if interest rates are cut too soon. The consensus in financial markets is that rates will be cut in August.
The Bank of England, like other central banks, aggressively increased interest rates from near zero in late 2021 to counter the rapid rise in inflation, which had surged above 11%. Higher interest rates have cooled the economy by making borrowing more expensive, which has helped to ease inflation. However, this has also meant that the British economy has barely grown since the pandemic rebound.
The outlook remains uncertain. The Bank of England will likely wait for further signs of inflation being under control before considering a rate cut.
