News in brief
The Office for National Statistics reported that UK inflation fell to the Bank of England’s 2.0% target in May, meeting Reuters economists’ 2% predictions. Services inflation was 5.7%, down from 5.9% in April. Core inflation, excluding energy, food, alcohol, and tobacco, fell to 3.5% from 3.9% in April. Azad Zangana, senior European economist and strategist at Schroders, warned that upward pressure could resurface in the second half of the year. The Bank is projected to maintain rates at 5.25%, where they were in August 2023 when inflation was 7.9%. Royal London Asset Management’s senior economist, Melanie Baker, agreed that an August interest rate cut is likely but said future data must indicate persistent inflation reduction.
Illustrated news
The Office for National Statistics said Wednesday that May U.K. inflation fell to the Bank of England’s 2.0% target in the last print before July elections.
The headline number fell from 2.3% in April and met Reuters economists’ 2% predictions.
Sterling climbed marginally after the announcement, reaching $1.2721 by 7:33 a.m. London.
In May, services inflation was 5.7%, down from 5.9% in April. The BOE regularly monitors services inflation because it dominates the U.K. economy and reflects domestic price increases.
Core inflation, excluding energy, food, alcohol, and tobacco, fell to 3.5% from 3.9% in April.
The ONS said falling food prices were the biggest factor, although motor fuel prices rose.
Tuesday’s Kantar grocery sales numbers showed the smallest increase in two years due to unseasonably harsh weather. According to the index, grocery sales rose 1.0% in the four weeks to June 9, the seventeenth straight monthly fall in food inflation.
Focus on Bank of England decision
As the U.K. phases down its energy price ceiling, Azad Zangana, senior European economist and strategist at Schroders, warned that upward pressure could resurface in the second half of the year.
“From the third, fourth quarter onwards, you might start to see a bit more upward pressure coming through as the Bank of England has warned,” he told CNBC’s “Squawk Box.”
When it meets on Thursday, Zangana said the Bank could “surprise” the market with a rate drop. Otherwise, the Bank is projected to maintain rates at 5.25%, where they were in August 2023 when inflation was 7.9%.
As inflation falls closer to target, markets are pricing in a near-term decrease. All but two of 65 Reuters analysts polled last week expected an interest rate cut in August, while financial markets expect one in September.
Melanie Baker, senior economist at Royal London Asset Management, agreed that an August interest rate cut is likely but said that future data must indicate persistent inflation reduction.
“Services CPI around the 6% mark continues to look inconsistent with being confident that you are going to sustainably hit a 2% inflation target, in my view,” she wrote.
The economic performance comes as polls predict a Labour party landslide victory in the July 4 U.K. general election.
On X, U.K. Prime Minister Rishi Sunak called the latest print “great news” and that inflation was “back to normal.”
Even if inflation is slowing, opposition member Rachel Reeves said “the cost of living crisis is still acute” for many families.
Source : CNBC News
