People shopping on the High Street in the Kingston district of London, UK
Bloomberg | Bloomberg | Getty Images
Inflation in Britain fell to the Bank of England's target of 2.0% in May, the Office for National Statistics said on Wednesday, in the final issue of key economic measures ahead of national elections in July.
It eased to 2% from 2.3% in April and was in line with the 2% expectations of economists polled by Reuters.
Sterling rose slightly shortly after the release, and was trading at $1.2721 at 7:33 a.m. London time.
Services inflation – which is closely watched by the BoE as it dominates the UK economy and reflects price increases generated at home – was 5.7% in May, compared with 5.9% the previous month.
Core inflation excluding energy, food, alcohol and tobacco eased to 3.5% from 3.9% in April.
The ONS said falling food prices were the biggest reason for the fall, while car fuel prices continued to rise.
New data from U.K. market research firm Kantar on Tuesday showed that unseasonably bad weather led to the slowest growth in grocery sales in two years. According to the index, grocery sales rose 1.0% in the four weeks to June 9, marking the sixteenth consecutive monthly decline in food inflation.
While the latest data brings inflation in line with the BoE's target, Azad Jangana, senior European economist and strategist at Schroders, cautioned that upward pressure could return in the second half of the year, as Britain ends its energy price cap.
“From the third, fourth quarter onwards, you'll start to see a little bit more upward pressure, as the Bank of England has warned,” he told CNBC's “Squawk Box.”
Zangana suggested the bank could also “surprise” the market by cutting rates this week, when it next meets on Thursday. Otherwise the bank is widely expected to keep rates steady at 5.25%, where they have been since August 2023 – when inflation was around 7.9%.
Still, with inflation now closer to target, markets are now expecting a rate cut in the near term. All but two of the 65 economists surveyed by Reuters last week said they expected an interest rate cut in August, while financial markets are expecting such a cut in September.
This economic performance comes as Britain prepares for a general election on July 4, with polls showing the opposition Labour Party will win a landslide victory.
British Prime Minister Rishi Sunak described the latest print as “great news” in a post on the X social media platform, adding that inflation was now “back to normal.”
Opposition politician Rachel Reeves acknowledged that although inflation is rising at a slower pace, “the cost-of-living crisis is still acute” for many families.