
UK inflation hits BoE’s 2% target in May, will interest rate cuts follow?
- UK inflation rate hits 2% target in May, down from 2.3% in April.
- Significant decline in food prices contributes to easing inflation.
- Bank of England's interest rate decision anticipated amid mixed economic signals.
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The annual inflation rate in the UK reached the Bank of England’s (BoE) target of 2% in May, according to a report released by the Office for National Statistics (ONS) on Wednesday.
This figure aligns with expectations and marks a decrease from April’s rate of 2.3%. The data highlights a significant easing in inflationary pressures, bringing some relief to consumers and policymakers alike.
Key factors influencing inflation rates
Copy link to sectionThe ONS report identifies food prices as the primary factor contributing to the decline in both the Consumer Prices Index including owner occupiers’ housing costs (CPIH) and the Consumer Prices Index (CPI) annual rates.
On the other hand, motor fuel prices showed a slight increase, making a sluggish contribution to the overall inflation figure.
On a monthly basis, CPI rose by 0.3% in May 2024, compared to a 0.7% increase in May 2023. The CPIH, which includes owner occupiers’ housing costs, increased by 2.8% over the 12 months to May 2024.
Core CPI and CPIH, excluding volatile items such as energy, food, alcohol, and tobacco, rose by 3.5% and 4.2%, respectively, during the same period.
Stage set for interest rate cuts?
Copy link to sectionThe Bank of England is set to announce its latest interest rate decision on Thursday. The current inflation figures have intensified discussions about potential interest rate cuts.
Financial markets had previously anticipated a rate cut in August, but the latest data has shifted expectations towards a possible reduction in September.
The BoE has been steadily increasing interest rates since December 2021 to combat soaring inflation, which peaked at 11.1% in October 2022—the highest level since 1981.
With inflation now aligning with the BoE’s target, there is cautious optimism about a potential easing of monetary policy.
What do the experts say?
Copy link to sectionThe Confederation of British Industry’s principal economist, Martin Sartorius, commented on the recent inflation data, stating,
“The fall in inflation will be welcome news to households, although many are still feeling the pinch. Today’s data sets the stage for the [Bank’s] Monetary Policy Committee to cut interest rates in August, in line with our latest forecast’s expectations.”
However, Sartorius also emphasized the need for caution, noting that domestic price pressures, such as elevated pay growth, are proving slower to decline. “Rate-setters will need to weigh the fall in headline inflation against these persistent domestic pressures,” he said.
Ruth Gregory from research firm Capital Economics expressed similar sentiments, stating,
Wednesday’s figures probably won’t be enough to persuade the Bank to cut rates on Thursday. And with services inflation nudging down only slightly, this leaves our forecast that the Bank will cut rates for the first time in August looking a little shakier.
Broader economic context
Copy link to sectionThe latest inflation figures come after a prolonged period of high inflation in the UK. The sustained inflationary pressures were driven by factors such as the COVID-19 pandemic and the war in Ukraine.
Despite the recent decline, the path to sustained economic stability remains uncertain.
The BoE’s upcoming decision on interest rates will be closely watched, as it will provide insights into the central bank’s strategy for maintaining price stability while supporting economic growth.
The potential for rate cuts later in the year underscores the BoE’s cautious approach in navigating the complex economic landscape.
The UK’s inflation rate hitting the BoE’s 2% target in May marks a significant milestone in the country’s economic recovery. While the decline in food prices played a crucial role in easing inflation, the persistence of services inflation remains a concern.
As the BoE prepares to announce its interest rate decision, the latest data sets the stage for potential rate cuts, although the timing and extent of these cuts remain subject to ongoing economic developments and domestic price pressures.
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