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Inflation has hit Britain’s target of 2 percent for the first time in three years, giving Prime Minister Rishi Sunak a boost in his efforts to turn around his struggling election campaign.
The figure means consumer price inflation has fallen to 2 percent, faster than in the US and the eurozone, a milestone after the worst rise in inflation in a generation. The Bank of England last achieved its inflation target of 2 percent in July 2021.
The Office for National Statistics figure for May CPI growth was in line with a forecast from economists polled by Reuters and fell from April’s 2.3 percent figure, driven by food and non-food prices. alcoholic beverages, recreation and furniture.
However, the latest figures showed that inflation in the services sector fell less sharply than economists had predicted. It fell to 5.7 percent in May, compared to 5.9 percent previously. Core inflation, which excludes food and energy, fell to 3.5 percent in May 2024, down from 3.9 percent in April, but still at high levels.
Sterling rose 0.15 percent to $1.2725 after the announcement.
“Inflation is on target, but the war on inflation is not yet won,” said Tomasz Wieladek, economist at T Rowe Price. “This morning’s strong levels of services inflation indicate that inflation is not yet falling in a sustainable manner.”
Sunak, who mentioned Britain’s July 4 election on the day the April figures were released, called the figures on LBC radio “very good news because the last two years have been very tough for everyone.” But his Conservative party remains about 20 points behind the opposition Labor party in the polls.
The BoE’s Monetary Policy Committee will set interest rates on Thursday, with analysts widely expecting rates to remain at a 16-year high of 5.25 percent.
Investors on Wednesday cut their bets on the first rate cut by a quarter point at the BoE’s August meeting to one in three, from a 45 percent chance just before the inflation figure was released.
While the first rate cut in November is still fully priced, traders are now betting there is about a 75 percent probability of a second rate cut of 0.25 percentage points this year, up from 95 percent when markets closed on Tuesday.
Market movements were driven by slow progress in reducing services inflation. The MPC is closely watching the indicator as a critical indicator of domestic price pressures as global shocks that have pushed up import prices fade.
Senior BoE officials have suggested that if inflation in the services sector falls in line with the central bank’s forecasts, they should be able to cut rates this year. But May’s figures were above the 5.5 percent forecast by analysts polled by Reuters, and inflation rates for the services sector and core inflation remain higher than the corresponding eurozone figures.
Strong services inflation in Britain in May was driven by high growth in airfare, accommodation and communications prices. Rob Wood, British economist at Pantheon Macroeconomics, said the continued strength of services inflation, coupled with strong wage growth, meant a rate cut in August was a “long bet”.
The decline in headline CPI inflation to 2 percent in May could be temporary, economists warned, as downward pressure from energy prices eases. The BoE predicted at its most recent meeting that CPI inflation would trend higher later this year, towards 2.6 percent in the final quarter.
“We expect inflation to recover somewhat from June onwards,” said Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research. “As today’s data suggests core inflation remains high, this recovery could be sharper than expected.”
The Conservatives and Labor discussed the figures as they campaigned. “I know we’ve had a lot of shocks where people’s bills have gone up because of inflation,” Sunak said.
“But we stuck to a plan and took action. That wasn’t always easy, but we succeeded. Inflation is back on track and that means people will start to feel the benefits and alleviate some of the burden on the cost of living.”
Rachel Reeves, Labour’s shadow chancellor, said the lower headline inflation rate was welcome but households were still struggling. The general price level remains 20 percent higher than this time in 2021, when inflation started to increase.
“Unlike Conservative ministers, I am not going to say that everything is fine and that the cost of living crisis is over, because I know the pressure on family finances is still acute,” she told BBC Radio 4. Today program.
Additional reporting by Lucy Fisher and Jim Pickard in London