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Market Analysis

UK Inflation Hits Target for First Time Since 2021
Amos Simanungkalit · 15.4K Views

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British inflation returned to its 2% target in May for the first time in nearly three years, as reported on Wednesday. However, underlying price pressures remained significant, suggesting the Bank of England (BoE) will likely delay any interest rate cuts.

 

The drop in headline inflation will be welcomed by both Prime Minister Rishi Sunak and the BoE. However, it may have come too late to improve Sunak's standing for the upcoming election next month or to trigger a BoE rate cut on Thursday.

 

Data indicated that services price inflation, considered by the BoE to better reflect medium-term inflation risks, was at 5.7%. This is a decrease from April’s 5.9% but not as much as the anticipated 5.5%.

 

Sterling saw a modest rise against the U.S. dollar following the data release.

 

"Rate-setters will still need to weigh the fall in headline inflation against signs that domestic price pressures, such as elevated pay growth, are proving slower to come down," stated Martin Sartorius, principal economist at the Confederation of British Industry, predicting a potential first rate cut in August.

 

The decline in annual consumer price inflation from April’s 2.3% was in line with economists' median expectations in a Reuters poll and represents a sharp fall from the 41-year high of 11.1% reached in October 2022.

 

This decline has been more pronounced than in the euro zone or the United States, where May's consumer price inflation was 2.6% and 3.3% respectively, countering last year’s concerns that British inflation was unusually persistent.

 

Despite this, consumer prices have risen around 20% over the past three years, affecting living standards and contributing to the unpopularity of Sunak's Conservatives, who are trailing the opposition Labour Party by about 20 points in opinion polls.

 

The BoE has indicated that merely returning to its inflation target is insufficient to commence cutting interest rates.

 

While most economists in a Reuters poll expect the BoE to start reducing rates from a 16-year high of 5.25% in August, financial markets predict the first move is more likely in September or October, with only a 10% chance of a cut this week.

 

The recent fall in inflation was primarily driven by a cut in regulated household energy bills in April. However, this effect is expected to diminish later in the year, when the BoE forecasts inflation will rise again.

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.

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