UK inflation falls to 2 per cent target for first time in three years

British inflation fell back to the Bank of England’s 2 per cent target for the first time in almost three years, a milestone that likely comes too late to improve the political fortunes of prime minister Rishi Sunak before the looming election.

Consumer price growth eased in May from 2.3 per cent the month before, the Office for National Statistics said on Wednesday.

Those figures should keep the central bank on track to cut interest rates in the coming months, even though Bank of England officials have signalled they are unlikely to announce a policy shift on Thursday due to the election campaign.

The slowdown in price growth has allowed Sunak to declare victory over a brutal cost-of-living squeeze, after inflation reached double digits in 2022 because of Russia’s war in Ukraine and the end of pandemic restrictions. The decrease is unlikely to be enough to help the ruling Conservative Party, which polls show is heading for defeat to Labour in the July 4th election.

BOE policymakers may appreciate the extra month to weigh lingering signs of sticky prices beyond the headline rate. Inflation in the services sector remained higher than expected, registering a 5.7 per cent gain last month after a reading of 5.9 per cent in April. Economists had expected a sharper decline to 5.5 per cent. Forecasters suggest headline inflation rate will pick up to 2.4 per cent by the end of the year.

The ONS said that prices in restaurants and hotels contributed most to the headline rate with the sector passing on demands for higher pay, not least after the rise in the minimum wage. Rent and fuel costs also were upward forces on services.

“Inflation may be back at 2 per cent, but it might not be there for long,” said Zara Nokes, global market analyst at JPMorgan Asset Management. “Today’s inflation news puts the final nail in the coffin for any hopes of a rate cut from the Bank of England tomorrow. Services inflation is still running too hot.”

The pound erased modest losses after the release showed UK services inflation fell less than expected, denting expectations for rate cuts. Sterling traded as much as 0.2 per cent stronger at $1.2730. Traders priced chances of a quarter-point reduction in August at about 30 per cent, down from 45 per cent before the data.

The figures also leave the UK, which last year had the worst inflation problem among its big peers, now looking like a leader on suppressing price pressures. Only the US also has inflation at 2 per cent on a comparable measure, though its headline rate is higher. – Bloomberg