UK inflation meets 2% target during May
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UK consumer price index (CPI) inflation fell to the Bank of England’s 2% target in May, driven by lower food and core inflation.
While this puts the UK ahead of other G7 nations in curbing inflation, concerns remain about the rising cost of services, which remain above projections.
Peter Arnold, EY UK Chief Economist, explained: “Services inflation – one of the MPC’s key measures of inflation persistence – slowed to 5.7% year-on-year in May, down from 5.9% year-on-year in April. This was 0.4ppts above the latest Bank of England staff projection, the same gap as in the April data.
“The implications are not clear cut. On the one hand, such large overshoots will worry the more hawkish members of the MPC. But on the other hand, the doves can partially attribute this to the impact of April’s once-a-year price rises for many index-linked contracts and regulated prices. Those members can also point to loosening labour market conditions and softening pay growth as supporting rate cuts.”
Mr Arnold said he believes it is likely the “first rate cut will come in August, but the language of tomorrow’s MPC minutes will be an important guide”.
He added: “The EY ITEM Club also expects headline inflation will remain close to the Bank of England’s 2% target throughout the rest of this year.”
Kevin Brown, savings specialist at Scottish Friendly, said: “This inflation reading is what was expected by markets ahead of the announcement and is a significant moment as the inflation surge of the past two years has finally receded.
“Although price rise levels are now back on target, rate setters will be cautious ahead of any cut as wage rises are now strongly ahead of price increases. Taking the foot off the rate pedal too soon could reignite a wage-price spiral so it is likely policymakers will continue to act with an abundance of caution.
“Families looking for relief from rising prices will start to feel the benefit of a normalising situation, but the damage inflation has done is yet to be truly cancelled out by wage increases. Although rates are likely to be lowered very cautiously it is a good time now for savers to start considering alternatives as market rates begin to price in a falling bank rate.”