UK Inflation Drops to 2% Target for First Time Since 2021

• British inflation returned to its 2% target for the first time in nearly three years in May, but strong underlying price pressures all but rule out a pre-election interest rate cut. While Prime Minister Rishi Sunak welcomed the fall in headline inflation in May, it has likely come too late to turn around his fortunes in British elections on July 4 or to prompt a Bank of England (BoE) rate cut on Thursday.
• Office for National Statistics data showed services price inflation, which the BoE thinks gives a better picture of medium-term inflation risks, was 5.7%. That was down from 5.9% in April but higher than the 5.5% economists had forecast in a Reuters poll or the 5.3% predicted by the BoE last month.
• The drop in annual consumer price inflation from April's 2.3% reading - in line with economists' expectations - took it to its lowest since July 2021 and marks a sharp decline from the 41-year high of 11.1% in October 2022. The fall has been sharper than in the euro zone or the United States, where consumer price inflation in May was 2.6% and 3.3%, respectively, belying concerns a year ago that British inflation was proving unusually sticky.
• The BoE has said a return of inflation to its target is not enough on its own for it to start cutting interest rates. "Rate-setters will still need to weigh the fall in headline inflation against signs that domestic price pressures, such as elevated pay growth, are proving slower to come down," Martin Sartorius, principal economist at the Confederation of British Industry, said.
• The most recent fall in inflation was partly driven by a cut in regulated household energy bills in April - the effect of which will fade later in the year, when the BoE forecasts inflation will rise to 2.6%. Lower food prices were the biggest factor pushing inflation down in May, reducing the annual rate of inflation for food and non-alcoholic drinks to 1.7% from a 45-year high of 19.2% in March 2023.
• Cheaper electrical appliances and a smaller rise in the cost of recreational and cultural activities also helped lower inflation. Higher airfares were the biggest factor to cause services price inflation to fall less than expected. Airfares are volatile, and some economists view them as a poor guide to broader inflation trends.

(Source: Reuters)