UK inflation hits 2% target

Inflation in the UK has reached its 2% target for the first time in three years.

This figure indicates that consumer prices have dropped to 2%, putting the UK ahead of the US and Eurozone in achieving this milestone following the worst inflationary upsurge in a generation. The Bank of England last reached its 2% inflation target in July 2021.

The Office for National Statistics reported that CPI growth in May matched recent forecasts, decreasing from April's 2.3% rate. This decline was driven by lower prices in food and non-alcoholic beverages, recreation, and furniture.

However, the latest reading revealed a smaller decrease in services inflation than economists had anticipated. It dropped to 5.7% in May, compared to 5.9% previously. Core inflation, which excludes food and energy, fell to 3.5% in May 2024, down from 3.9% in April but still remaining elevated.

The Bank of England's Monetary Policy Committee is scheduled to set interest rates on Thursday, and analysts widely expect it to maintain the benchmark rate at its 16-year high of 5.25%.

On Wednesday, investors reduced their expectations for a quarter-point rate cut by the Bank of England at its August meeting to one in three, down from a 45% chance just before the inflation figures were published.

While the first rate cut is still fully anticipated by November, traders now estimate a 75% probability of a second 0.25 percentage point rate cut occurring this year, down from 95% at the close of business on Tuesday.

The market movements were influenced by the slow progress in reducing services inflation. The MPC is closely monitoring this gauge as a crucial indicator of domestic price pressures, especially as the global shocks that drove up import prices begin to fade.

Senior Bank of England officials have indicated that if services inflation declines in line with the central bank's forecasts, they should be able to cut rates this year.

The UK's strong services inflation in May was driven by significant growth in airfares, accommodation, and communication prices. Economists have warned that May's drop in headline CPI might be short-lived as downward pressures from energy prices wane. At its most recent meeting, the Bank of England predicted CPI inflation would start to rise later this year, reaching around 2.6% in the final quarter.

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