UK inflation eases to BoE's 2% target

It marked the first time inflation has hit the Bank of England’s target since July 2021 and leaves the door open for a potential rate cut from the Bank this summer. Inflation peaked at 11.1% in October 2022, hitting its highest level since 1981.

The largest downward contributions came from food and non-alcoholic beverages, recreation and culture, and furniture and household goods. The largest upward contribution was from transport.

The data showed that prices for food and non-alcoholic drinks rose 1.7%, down from 2.9% in April. This marked the lowest annual rate since October 2021.

The ONS said the rate has eased for the 14th month in a row from a recent high of 19.2% in March 2023, which was the highest annual rate in more than 45 years.

Services inflation fell to 5.7% in May from 5.9% a month earlier, missing expectations for a drop to 5.5%.

Meanwhile, core inflation - which strips out food, energy, alcohol and tobacco - eased to 3.5% from 3.9%, as expected.

Kathleen Brooks, research director at XTB, said: "The lack of progress made on core service prices, which include the costs of recreation and culture, eating out and staying in hotels, is keeping the Bank of England cautious when it comes to cutting interest rates.

"It also explains the muted reaction to the pound on the back of this report, GBP/USD has risen in the immediate aftermath and is back above $1.2720."

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "It’s been a long time coming, but finally inflation has hit the Bank of England’s target. The last time inflation stood at 2% was in the run up to the Euros in July 2021, just before pent-up demand was unleashed while pandemic restrictions eased. As fans toast the tournament once more, seeing inflation finally return to target might be seen as a reason to put out more bunting, given how painful the cost-of-living crisis has been.

"But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates tomorrow. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count.

"There will be concerns that services inflation has only retreated slightly, so although August remains a possibility for a rate cut, September is looking more likely - and the markets are only fully pricing in a rate cut in the Autumn.

"It is clear that disinflationary pressures have been building up through the UK economy. The effect of unemployment ticking up to 4.4% in April may have made some workers more cautious in their spending patterns. That certainly showed up in the latest economic growth figures, which showed activity in the retail sectors slowing sharply. The risk is that if borrowing costs stay high through the summer, the economy may struggle to shift meaningfully out of stagnation mode.

"There are signs that more consumers are increasingly financially resilient and may be willing to spend more, helping support the economy in the months to come, especially given the big sporting events filling calendars. But longer-term investment will still be needed to provide an engine of growth."