The United Kingdom’s inflation rate has officially fallen to the Bank of England’s 2% target, marking the first time this key economic goal has been met since July 2021.
Data released by the Office for National Statistics (ONS) on Wednesday confirmed the Consumer Prices Index (CPI) dropped to 2% in the year to May. This represents a notable decrease from the 2.3% figure recorded in April.
The decline was largely driven by a reduction in food prices, which provided the most significant downward pressure on the inflation rate. This development aligns with economists’ predictions and signals a major turning point after a prolonged period of high living costs.
Despite this positive news, the Bank of England is not expected to implement an immediate cut to interest rates, which currently stand at a 16-year high of 5.25%.
Impact on Interest Rates
While hitting the 2% target is a significant milestone, underlying price pressures remain a concern for policymakers. The Bank of England’s Monetary Policy Committee (MPC) is closely monitoring services inflation, which only saw a slight decrease from 5.9% to 5.7%.
This figure was higher than the 5.5% anticipated by economists and the Bank itself. The persistence of high services inflation suggests that domestic price pressures have not eased as much as desired, complicating the decision to lower borrowing costs.
Financial markets have consequently adjusted their expectations, now pricing in the first interest rate cut for August or September rather than the previously anticipated June meeting. The MPC is scheduled to announce its next decision on interest rates this Thursday.
Political and Economic Context
The inflation figures have become a central topic in the UK’s general election campaign. Prime Minister Rishi Sunak highlighted the achievement, stating it demonstrates that his economic plan is effective and brings “hard-earned economic stability.”
Conversely, Shadow Chancellor Rachel Reeves argued that households are still facing significant financial strain from cumulative price increases over recent years. She emphasized that the cost of living crisis has not concluded for many families across the country.
The ONS data also revealed that while food and non-alcoholic beverage prices fell this year, they had risen sharply during the same period in 2023. Additionally, motor fuel prices saw an increase, partially offsetting the positive impact of lower food costs.
Core inflation, which excludes volatile items such as energy, food, alcohol, and tobacco, also showed a decrease, falling from 3.9% to 3.5%. This indicates a broader, albeit gradual, easing of underlying price pressures within the economy.
