British inflation fell back to the Bank of England’s 2 percent 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 percent the month before, the Office for National Statistics said on Wednesday. While that should keep the central bank on track for interest-rate cuts later this year, services inflation remained sticky, which is likely to keep policymakers cautious about acting.
The figures allowed Sunak to declare victory over a brutal cost-of-living squeeze, after inflation reached double digits in 2022 following the war in Ukraine and the end of pandemic restrictions. Still, that’s unlikely to be enough to help the ruling Conservative Party, which polls show is heading for defeat in July 4 election.
For the BOE, which was not expected to move rates Thursday in the midst of the election campaign, the figures are a reminder of lingering pressures on underlying prices.
Inflation in the services sector remained higher than expected, with prices rising 5,7 percent last month after a reading of 5,9 percent in April. Economists had expected a sharper decline to 5,5 percent. Forecasts suggest headline inflation rate will pick up to 2,4 percent 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 percent, 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 percent stronger at US$1,2730.
Traders priced chances of a quarter-point reduction in August at about 30 percent, down from 45 percent before the data.
The figures also leave the UK, which last year had the worst inflation problem among its major peers, now looking like a leader on suppressing price pressures.
Only the US also has inflation at 2 percent on a comparable measure, though its headline rate is higher.
“The UK has won the international race to get back to target, being the first among the euro area and US to bring headline inflation back down to 2 percent,” the Resolution Foundation said.
“In fact, the UK currently has the lowest headline inflation rate in the G-7 bar Italy.”
Soaring prices and last year’s recession took a bite out of the Conservatives’ reputation for managing the economy. Politicians seized on the figures, with Sunak hailing, “great news” that inflation is “back to normal at 2 percent — that’s lower than Germany, France and America”. — Bloomberg
