Inflation in the UK has eased to 2%, raising the possibility of an interest rate cut in the coming months. The Office for National Statistics (ONS) confirmed on Wednesday that the consumer prices index (CPI) rate for the year to May was 2%, indicating a slower pace of price increases since July 2021. The ONS attributed this decrease to falling food prices, while the cost of motor fuel saw a slight increase. Officials also noted that core inflation, which excludes volatile elements such as food and energy, fell to 3.5% in May, in line with expectations.
However, some experts expressed concern over the services inflation rate, which only dropped from 5.9% in April to 5.7% in May. This prompted financial markets to shift their expectations of an interest rate cut from August to September. This latest development follows a period of high inflation in the UK, which peaked at 11.1% in October 2022 – the highest level since 1981.
The Bank of England is scheduled to announce its decision on interest rates on Thursday. The Bank has been gradually increasing rates since December 2021 in an effort to bring down inflation, which surged in the aftermath of the COVID-19 pandemic and the ongoing conflict in Ukraine, to its target of 2%. Most analysts predict that rates will remain at 5.25% for the seventh consecutive time this week, amidst concerns that inflation may rise again in the second half of the year.
The possibility of a rate cut this week was further diminished last month when wage growth – a key driver of inflation – exceeded expectations. Although inflation eased to 2.3% in April, the decline was not as significant as predicted by economists and the Bank of England. Today’s inflation figures and Thursday’s interest rate decision are expected to be the final major economic announcements before the upcoming general election.
Martin Sartorius, principal economist at the Confederation of British Industry, welcomed the drop in inflation as “good news for households,” but acknowledged that many are still facing financial strain. He also noted that these figures set the stage for the Bank’s Monetary Policy Committee to cut interest rates in August, in line with their latest forecast. However, Sartorius cautioned that the Bank may proceed cautiously beyond August, considering factors such as elevated pay growth and geopolitical tensions.
Ruth Gregory of research firm Capital Economics believes that Wednesday’s figures may not be sufficient to convince the Bank to cut rates this week. She added that with services inflation only marginally decreasing, their forecast of a rate cut in August may be less certain. Similarly, Rob Wood of Pantheon Macroeconomics stated that there is a possibility that the Bank’s first rate cut of the year may be delayed until September, as services inflation has remained stubbornly high.
Unite’s general secretary Sharon Graham called for the Bank to take immediate action and lower interest rates to alleviate the financial burden on homeowners. She emphasized that while inflation may have decreased, the cost of living crisis continues to affect millions of people.
Political parties have also clashed over the latest figures, with Chancellor Rishi Sunak hailing the drop in inflation as “great news” in a video posted on social media. He credited the government’s clear plan for the turnaround in the economy and warned against putting this progress at risk with a change in leadership. However, Labour’s shadow chancellor Rachel Reeves criticized the Conservative party for 14 years of economic chaos, stating that working people are worse off with rising prices and high taxes. Liberal Democrat Treasury spokeswoman Sarah Olney also pointed out that millions of people are not feeling any better off despite the decrease in inflation.