UK inflation returned to the 2% target for the first time in nearly three years during May, but experts have cautioned a summer interest rate cut is not a done deal.
In a symbolic moment for the UK economy after a painful cost-of-living crisis, official figures revealed that Consumer Prices Index (CPI) inflation eased to 2% last month, down from 2.3% in April, thanks largely to easing food price rises.
CPI was last recorded at the 2% target in July 2021, before rocketing up amid a cost crisis that hammered households and businesses, at one stage reaching a 41-year high of 11.1% in October 2022.
The latest fall means that prices are still rising across the country, but at a much slower rate than in recent years.
Speaking on LBC Radio on Wednesday, the Prime Minister Rishi Sunak said: “It’s very good news because the last few years have been really tough for everybody … But we’ve stuck to a plan, we’ve taken the action needed, it wasn’t always easy, but we’ve got there, and inflation is back to target.”
But experts said that, while an important marker, it was not set to mean an imminent reduction to interest rates from the current 5.25%.
A cut on Thursday, when the Bank of England announces its next decision, is seen as being “off the table” given the General Election and some warned that stubbornly high inflation in the services sector could even put a reduction in August at risk.
Financial markets have cut bets on an August rate cut following the latest data, putting the chance at about 35%.
The data comes at a crucial time, less than three weeks before the July 4 polling day and as the political parties home in on economic pledges in their manifestos.
Experts said that, despite the milestone for inflation, there is still work to do in bringing down prices throughout the economy.
The Bank is keeping a watchful eye on inflation in the services sector, which fell from 5.9% to 5.7% in May, but this was above forecasts as it remains stubbornly high.
It is one of the factors that has been partly responsible for staying the Bank’s hand in bringing rates down from their 16-year high of 5.25%.
Victoria Clarke, UK chief economist at Santander corporate investment bank, said: “We do not expect the Bank to cut rates tomorrow.
“Our base case has been for an August cut, but this will be reliant on these broader signals continuing to decisively soften over the next month’s data.
“As such, a risk of a later than August move is there, after today’s services print.”
