UK inflation back to 2% target for first time since 2021 (updated)

Sartorius AG

19/06/2024 07:10

* 
      UK CPI falls to 2% in May from April's 2.3%
    

        * 
      Services inflation falls less than expected to 5.7%
    

        * 
      Economists do not expect BoE to cut rates until Aug
    

        * 
      UK inflation peaked at 11.1% in Oct 2022
    

  
 (Adds reaction in paragraphs 5, 11, 15)
    By David Milliken and Suban Abdulla
       LONDON, June 19 (Reuters) - British inflation returned
to its 2% target in May for the first time in nearly three
years, data showed on Wednesday, but underlying price pressures
remained strong, meaning the Bank of England is likely to wait
longer before cutting interest rates.
    While the fall in headline inflation in May will be welcomed
by both Prime Minister Rishi Sunak and the BoE, it is likely to
have come too late either to turn around Sunak's fortunes at
next month's election or to prompt a BoE rate cut on Thursday.
    The Office for National Statistics data showed services
price inflation, which the BoE thinks gives a better picture of
medium-term inflation risks, was 5.7%. That was down from 5.9%
in April but not as big a drop as the 5.5% economists had
forecast in a Reuters poll.
    Sterling  GBP=  rose modestly against the U.S. dollar and
the euro after the data.
    "(BoE) Governor (Andrew) Bailey is likely to be the happiest
man in the Square Mile this morning," said Michael Brown, senior
research strategist at currency brokers Pepperstone, but added
the BoE was likely to wait until August before cutting rates.
    The drop in annual consumer price inflation from April's
2.3% reading - in line with economists' expectations - took it
to its lowest since July 2021 and marks a sharp decline from the
41-year high of 11.1% in October 2022.
    The fall has been sharper than in the euro zone or the
United States, where consumer price inflation in May was 2.6%
and 3.3% respectively, belying concerns a year ago that British
inflation was proving unusually sticky.
    Inflation first began to pick up in most Western economies
in the second half of 2021 due to bottlenecks from the COVID-19
pandemic, then surged after Russia's full-scale invasion of
Ukraine in February 2022 caused natural gas prices to soar.    
    Consumer prices in Britain are up around 20% over the past
three years, squeezing living standards and contributing to the
unpopularity of Sunak's Conservatives, who are around 20 points
behind the opposition Labour Party in opinion polls.
    Sunak said in a video clip that the drop in inflation since
he took over from his Conservative predecessor Liz Truss - whose
fiscal policy triggered a surge in government borrowing costs -
was evidence that his economic policies were working.
    "Let's not put all that progress at risk with Labour," he
said.
    Rachel Reeves, the Labour lawmaker who looks set to be
Britain's next finance minister after the July 4 election, said
the Conservatives would bring "five more years of chaos".
    
    NO EARLY RATE CUT    
    The BoE has said a return of inflation to its target is not
enough on its own for it to start cutting interest rates.
    "Rate-setters will still need to weigh the fall in headline
inflation against signs that domestic price pressures, such as
elevated pay growth, are proving slower to come down," Martin
Sartorius, principal economist at the Confederation of British
Industry, said.
    While most economists polled by Reuters think the central
bank will start to cut rates from a 16-year high of 5.25% in
August, financial markets think a first move is more likely in
September or November and see less than a 10% chance of a cut
this week.
    The most recent fall in inflation was partly driven by a cut
in regulated household energy bills in April - the effect of
which will fade later in the year, when the BoE forecasts
inflation will rise again.
    Lower food prices were the biggest factor pushing down on
inflation in May, reducing the annual rate of inflation for food
and non-alcoholic drinks to 1.7% from a 45-year high of 19.2% in
March 2023. 

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UK inflation returns to target for first time since 2021    https://reut.rs/3RWGXrp
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 (Reporting by David Milliken and Suban Abdulla; Editing by Kate
Holton and Alexander Smith)
 ((david.milliken@thomsonreuters.com; +44 20 7513 4034;))