UK
inflation
dropped
to
2%
in
May,
according
to
the
Office
for
National
Statistics,
increasing
pressure
on
the
Bank
of
England
to
cut
interest
rates
in
the
coming
months.
The
fall
in
the
annual
inflation
rate
to
2%
was
in
line
with
market
consensus
and
marks
the
first
time
in
since
July
2021
that
this
has
been
in
line
with
the
official
inflation
target.
May’s
fall
in
the
inflation
rate
was
driven
by
lower
prices
for
food,
drink,
furniture,
recreation
and
household
goods,
the
ONS
said.
The
Bank
of
England
will
announce
its
interest
rate
decision
tomorrow,
but
is
expected
to
hold
rates
at
5.25%,
the
same
level
they
have
been
since
August
2023.
Market
data,
as
measured
by
overnight
index
swaps,
suggest
a
rate
cut
is
more
likely
in
August,
when
the
Bank
releases
its
quarterly
monetary
policy
report
and
holds
a
press
conference.
“Today’s
inflation
reading
will
help
the
case
for
rate
cuts,
with
the
UK
now
operating
with
one
of
the
highest
interest
rates
in
the
developed
world,
giving
it
much
room
for
manoeuvre,”
says
Michael
Field,
European
market
strategist
at
Morningstar.
Core
Inflation
Remains
Too
High
On
the
side
of
an
interest
rate
“hold”
are
services
inflation
and
so-called
“core”
inflation
(a
longer-term
measure
that
excludes
transitory
price
changes
in
energy
or
food),
which
the
Bank
of
England
is
still
monitoring
closely.
Annual
services
inflation
fell
from
5.9%
to
5.7%
from
April
to
May,
but
even
this
level
is
still
too
high
for
policymakers,
who
are
forecasting
a
services
inflation
rate
of
5.3%
this
year.
Field
highlights
that
the
rate
of
core
inflation
also
remains
high –
at
3.5%.
Services
costs
and
home
ownership
costs,
a
key
component
of
the
core
inflation
measure,
are
likely
to
remain
elevated,
he
says.
Policymakers
are
more
concerned
about
core
CPI
because
it’s
falling
more
slowly
than
the
headline
rate
of
inflation.
It’s
also
considered
a
more
realistic
measure
of
price
pressures
in
the
UK
economy
than
the
lower
headline
CPI
rate.
When
Will
the
Bank
of
England
Cut
Rates?
James
Lynch,
fixed
income
investment
manager
at
Aegon
Asset
Management,
praised
the
Bank
for
achieving
a
“gargantuan
task”
of
bringing
the
Consumer
Price
Index
from
11%
in
2022
to
2%
in
May
2024.
But
policymakers
will
not
be
ready
to
cut
rates
until
services
inflation
is
tamed,
he
adds.
“The
underlying
mix
of
the
inflation
basket
does
not
give
it
much
comfort
that
this
return
to
2%
target
is
sustainable,”
he
said
in
a
note.
The
Bank
of
England’s
latest
forecast
has
inflation
falling
below
target
in
the
coming
months
before
rising
to
2.5%
in
the
latter
half
of
2024
as
favourable
comparisons
with
May
2023
drop
out
of
the
data.
Economists
are
divided
on
when
rates
will
be
cut.
The
meeting
onm
1
August
is
the
most
likely
date,
writes
James
Richard
Sproule,
chief
UK
economist
at
Handelsbanken,
in
a
note.
“Given
today’s
data,
a
25bp
reduction
in
August
(and
a
second
25bp
reduction
in
December)
remains
our
central
forecast,”
he
says.
“The
MPC
has
set
out
that
it
wants
to
see
inflation
sustainably
at
its
target
level
before
it
begins
to
reduce
interest
rates,
so
today’s
figures
will
be
a
help,
but
are
not
yet
sufficient.”
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