David Milliken and Subhan Abdullah
LONDON (Reuters) – British inflation returned to the target of 2 percent in May for the first time in nearly three years, data showed on Wednesday, but underlying price pressures remain strong, meaning the Bank of England is likely to take longer to cut interest rates.
The fall in headline inflation in May was welcomed by both Chancellor Rishi Sunak and the Bank of England, but it is likely too late to turn around Sunak’s fortunes in next month’s general election or prompt the Bank of England to cut interest rates on Thursday.
Services prices rose 5.7%, a figure the Bank of England sees as a more accurate indicator of medium-term inflation risks, according to data from the Office for National Statistics, down from 5.9% in April but not as sharp a drop as the 5.5% forecast by economists in a Reuters poll.
The pound rose slightly against the US dollar and the euro after the data was released.
“(Bank of England) Governor Andrew Bailey will likely be the happiest man in town this morning,” said Michael Brown, senior research strategist at currency broker Pepperstone, but added that the BoE was likely to wait until August before cutting rates.
The annualized consumer price index fell from 2.3% in April (as economists expected), the lowest since July 2021 and down significantly from October 2022’s 41-year high of 11.1%.
The fall was bigger than the 2.6% and 3.3% rises in consumer prices in the euro zone and the United States in May, refuting concerns expressed a year ago that British inflation was excessively high.
Inflation first began to rise in most Western economies in the second half of 2021 due to bottlenecks caused by the COVID-19 pandemic, and then spiked after Russia’s full-scale invasion of Ukraine in February 2022 caused prices to soar.
British consumer prices have risen about 20 percent over the past three years, squeezing living standards and adding to the unpopularity of Sunak’s Conservative Party, which is about 20 points behind the opposition Labour Party in opinion polls.
In the video clip, Sunak said the fall in inflation since he took over from his Conservative predecessor Liz Truss, whose fiscal policies caused a surge in government borrowing costs, was proof his economic policies were working.
“Let’s not let Labor put the progress we’ve made at risk,” he said.
Rachel Reeves, the Labour MP who is expected to become Britain’s next chancellor of the exchequer after the July 4 general election, said the Conservatives would deliver “another five years of chaos”.
No early rate cut
The Bank of England has said that inflation returning to its target is not enough to start cutting interest rates.
“Rate setters still need to weigh the decline in headline inflation against signs that domestic price pressures are taking longer to ease, including rising wage growth,” said Martin Sartorius, chief economist at the Confederation of British Industry.
Most economists surveyed by Reuters think the central bank will start cutting rates from a 16-year high of 5.25 percent in August, but financial markets see the first move as more likely in September or November, making a cut this week less than 10 percent likely.
The recent fall in inflation is partly due to a cut in regulated household energy tariffs in April, but the effect of this will fade later in the year when the Bank of England expects inflation to rise again.
Falling food prices were the biggest factor pushing down inflation in May, with annual inflation for food and non-alcoholic drinks falling to 1.7% from a 45-year high of 19.2% in March 2023.