Shoppers on the high street in Kingston, London, UK
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UK inflation fell to the Bank of England's 2.0% target in May, the Office for National Statistics reported on Wednesday, in the latest edition of the key economic measure ahead of the national election in July.
The headline reading fell from 2.3% in April, and was in line with the 2% expectations of economists polled by Reuters.
The British pound rose slightly shortly after the release, trading at $1.2721 by 7:33 a.m. London time.
Services inflation – which the Bank of England closely monitors given its dominance within the UK economy and its reflection of domestically generated price rises – was 5.7% in May, compared to 5.9% during the previous month.
Core inflation, excluding energy, food, alcohol and tobacco, fell to 3.5% from 3.9% in April.
The Office for National Statistics said lower food prices were the biggest contributor to the declines, while motor fuel costs continued to see upward pressure.
Unusually bad weather has led to the slowest increase in grocery sales in two years, new figures released by British market research firm Kantar showed on Tuesday. Grocery sales rose 1.0% in the four weeks to June 9, marking the 16th straight monthly decline in food price inflation, according to the index.
Bank of England decision to focus
While the latest reading brings inflation in line with the Bank of England's target, Azad Zangana, chief European economist and strategist at Schroders, warned that upward pressure could return in the second half of the year, as the UK phases out energy price caps.
“From the third and fourth quarter onward, you may start to see more upward pressure as the Bank of England has warned,” he told CNBC's “Squawk Box.”
Zangana indicated that the bank may “surprise” the market with an interest rate cut this week, when it next meets on Thursday. The bank is widely expected to keep interest rates steady at 5.25%, where they have been since August 2023 – when inflation was hovering around 7.9%.
However, with inflation approaching target, markets are now anticipating a cut in interest rates in the near term. All but two of the economists polled by Reuters last week said they expect interest rates to be cut in August, while financial markets expect such a cut in September.
Melanie Baker, chief economist at Royal London Asset Management, agreed that a rate cut in August looked likely, but added that the next printed data would need to show that inflation had fallen on a sustained basis.
“The services sector CPI at 6% still seems inconsistent with confidence that you will sustainably achieve the 2% inflation target, in my view,” she said in a note.
The economic performance comes as the United Kingdom prepares to hold its general election on July 4, with opinion polls indicating a landslide victory for the opposition Labor Party.
British Prime Minister Rishi Sunak described the latest publications as “fantastic news” in a post on social media platform X, adding that inflation had now “returned to normal.”
Opposition politician Rachel Reeves admitted that although inflation was growing at a slower rate, the “cost of living crisis was still acute” for many families.
