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UK inflation fell to the Bank of England's 2% target for the first time in almost three years. business news

UK inflation fell to the Bank of England's 2% target for the first time in almost three years.  business news
UK inflation fell to the Bank of England's 2% target for the first time in almost three years.  business news

 


Inflation in the UK has eased to 2%, raising the prospect of a rate cut in the coming months.

The Office for National Statistics (ONS) released the Consumer Price Index (CPI) rate for the year to May on Wednesday.

These figures show that prices are still rising, but at the slowest pace since July 2021.

The ONS said the fall in food prices was mainly down, while car fuel costs rose slightly.

Officials added that core inflation, which excludes highly volatile factors such as food and energy, fell to 3.5% in line with the May forecast.

However, some commentators have expressed concern that service inflation, which includes sectors such as the hotel industry, fell only to 5.7% in May from 5.9% in April.

Financial markets had previously expected a rate cut in August, but on Wednesday they shifted gears toward a September rate cut.

The latest figures come after continued high inflation in the UK, with inflation peaking at 11.1% in October 2022, the highest level since 1981.

The Bank of England is due to announce its latest decision on interest rates on Thursday.

The central bank has been steadily raising interest rates since December 2021 in an effort to lower inflation, which has soared due to the COVID-19 pandemic and the war in Ukraine, to its target of 2%.

Most analysts expect interest rates to remain at 5.25% for the seventh straight session this week amid concerns that inflation could rise again in the second half of the year.

The forecast for an interest rate cut this week came as a shock as the wage increase rate, which drives inflation, was higher than expected last month.

Inflation eased to 2.3% in April, but the fall was not as large as economists and the Bank of England had expected.

Today's inflation figures and Thursday's interest rate decision are likely to be the final major economic announcements before next month's general election.

Interest rate cut ‘stage setting’?

Martin Sartorius, chief economist at the Confederation of British Industry, said falling inflation would be “welcome news for households”. But he said many people are still struggling.

He said: “Today’s data sets the stage for: [Bank’s] The Monetary Policy Committee is expected to cut interest rates in August, according to its latest forecast.

“But interest rate makers will have to weigh the decline in headline inflation against signs that domestic price pressures, such as wage growth, are slowing to come down.

“This means we are likely to move cautiously beyond August to avoid further upward pressure on inflation, especially as domestic growth prospects improve and geopolitical tensions remain high.”

Concerns about service inflation

Ruth Gregory of research firm Capital Economics said the numbers released Wednesday “probably won't be enough” to persuade the bank to cut interest rates on Thursday.

“And with services inflation only slightly lower, our forecast that the bank will cut interest rates for the first time in August is a little more shaky,” she added.

Rob Wood of Pantheon Macroeconomics agreed there was a risk the bank's first interest rate cut of the year could now be delayed until September.

“The bad news is that services inflation appears to have been noticeably persistent, slowing from 6.1% in February to 5.7% in May,” he said. “This is a period when large base effects should have weighed heavily on year-on-year inflation rates. “He said.

“We will have to look at all the detailed data carefully.”

Meanwhile, Unite general secretary Sharon Graham urged the bank to cut interest rates faster.

“Falling inflation does not mean falling prices. The worst cost-of-living crisis in generations continues,” she said.

“We need action from the Bank of England from Thursday to lower interest rates and ease the pressure on homeowners.”

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8:42 Inflation decline 'crucial moment'

ruling and opposition parties clash over numbers

Rishi Sunak described the fall in inflation as “good news” in a video posted on social media.

“When I became prime minister, inflation was at 11 per cent. But we took bold steps. We stuck to a clear plan and the economy has now turned the corner,” he said.

“So let’s not jeopardize all the progress made because of Labour.”

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4:13 'The cost of living crisis is not over'

“After 14 years of economic chaos under the Conservatives, the lives of workers have worsened,” said Labor shadow prime minister Rachel Reeves.

“Shop prices are up, mortgages are higher and taxes are at their highest in 70 years.”

“The devastating truth is that millions of people will be no better off today,” said Sarah Olney, Lib Dem treasury spokeswoman.

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