UK Inflation: What to Expect from May Data

UK inflation figures will be watched more closely than usual on Wednesday as the Office for National Statistics releases CPI data from May.

Inflation is expected to reach the official target of 2% last month, up from 2.3% in April, according to FactSet consensus figures. It is the first time the inflation rate has reached this level since July 2021, and three years in which the CPI fell after hitting 11.1%.

The release of this data is also significant in that it is the last inflation data before the general election on July 4. The Conservative Party is campaigning on this issue, saying it is largely responsible for raising inflation to the target level.

If inflation falls back to 2%, the Bank of England will be pressured to cut interest rates from their current level of 5.25%. That seems unlikely at the June 20 meeting, but it can't be completely ruled out.

Nonetheless, it will be pleasing to the bank to see inflation back down to 2%. The increase in interest rates from 0.1% in December 2021 to 5.25% by August 2023 ultimately shows that the sharp monetary tightening was effective. During this period, central banks pumped the brakes to combat a surge in inflation not seen in decades.

As we enter mid-2024, inflation appears to be continuing in the United States and the Eurozone. Recently, the European Central Bank (ECB) raised its inflation forecast for this year, and the Federal Reserve adjusted its core inflation forecast for the end of this year higher.

Prices don't fall, they just rise less quickly.

The UK's April CPI came in at 2.3%, rather than the 2.1% forecast. This shows that the path to achieving the goal is uneven. Services inflation was still at 5.9% in April, a concern for the Bank of England as it considers interest rate cuts.

In April, inflation fell from 2.6% to 2.3% due to lower energy prices.

Food and beverage price increases are moderating from 2023 levels, but basic food prices are well above where they were before the global inflation surge.

Core CPI, which excludes volatile energy and food prices, fell from 4.2% in March to 3.9% in April. The FactSet consensus showed UK core CPI falling to 3.5% in May. Policymakers are more concerned about core CPI because it is falling more slowly than the headline inflation rate and is also higher than the corresponding indicators.

For British politicians hitting the streets this month, disinflation is a hard sell to voters. Because prices overall are still rising.

“Once inflation eases, improvement may be difficult to spot. The situation is getting worse a little more slowly than before. You are also living with all the damage that has previously occurred,” Sarah Coles, head of personal finance at Hargreaves Lansdown, said in her note.

What will inflation look like for the remainder of 2024? According to the Bank of England's latest forecast for May 2024, inflation is expected to fall to its target of 2%, then fall below that and then rise again to 2.5%. The bank cites the “resolution of energy-related base effects”, which means favorable comparisons to 2023 will start to drop in the figures.

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