Inflation is finally back at 2% in the UK

UK inflation slowed to 2% in May, falling to the Bank of England’s target for the first time in nearly three years as food price rises eased sharply.

The consumer price data published Wednesday means the United Kingdom is now ahead of most other G7 economies in bringing inflation back to the level central bankers try to maintain to help households and businesses.

But the figures also showed that the prices of services, such as haircuts, hotels and restaurants, are still rising too fast.

That suggests the Bank of England won’t follow the European Central Bank in cutting interest rates when it meets Thursday. A rate cut in August, when UK policymakers meet next, is now also less likely.

Services inflation, at 5.7% last month, down from 5.9% in April, is “still running too hot,” said Zara Noakes, 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… If this stickiness in domestic price pressures continues, alongside ongoing resilience in economic activity, an August rate cut could well be off the table too,” she added.

Other economists, including analysts at Nomura, thought an August rate cut was still possible if pay rises and the price of services cooled further. “For an August rate cut, we will need other economic news to play ball,” the analysts wrote in a note.

Following a long-running campaign to tame soaring inflation, the Bank of England hiked benchmark borrowing costs to 5.25% last August — their highest level in 16 years and where they have stayed since. UK inflation peaked at 11.1% in October 2022, driven to a 41-year high by surging food and energy costs.

While it has been easing steadily since — and wages have now grown faster than prices for close to a year — many Brits are still struggling to pay their bills. Persistently high living costs are likely to be top of mind for voters when they elect a new government on July 4.

“Workers now have more money in their pockets than they did last year… But the bad news is that most people are feeling poorer than when they voted in the last general election nearly five years ago,” said Rebecca Florisson, principal analyst at the Work Foundation at Lancaster University in England.

“For many workers the cost-of-living crisis is not over yet.”

According to Jake Finney, an economist at PwC UK, consumer prices have risen by 20% since inflation was last at target in July 2021. He cautioned that headline inflation could pop back above the 2% target as soon as next month if prices continued to rise at their current pace.

“It is not ‘job done’ yet,” he said.

Similarly to the United Kingdom, inflation has also proven surprisingly stubborn in the United States and Europe, prompting traders to scale back expectations for interest rate cuts from major central banks.

Although the European Central Bank cut rates earlier this month, it raised its inflation forecast for this year and said consumer prices in the 20 countries that use the euro were likely to stay above its 2% target well into next year.