UK Inflation Drops to 2%

In May, British annual inflation eased to 2.0% from 2.3% in April, marking a return to the Bank of England's target level for the first time since July 2021. This data, released by the UK's Office for National Statistics (ONS), aligns with expectations from the market, reflecting a diminishing impact of the COVID-19 pandemic and the ongoing conflict in Ukraine.

On a monthly basis, inflation rose for the second consecutive month by 0.3 percent in May. This moderation in inflation is likely to be positively received by Prime Minister Rishi Sunak and the Bank of England, although its impact on the upcoming general election next month or on imminent interest rate decisions is expected to be minimal, according to Reuters.

The slowdown in May's inflation was driven by reduced expenditure in sectors like restaurants, hotels (up 5.8% from 6% in April), leisure, culture (up 3.9% from 4.4%), and food prices (up 1.7% from 2.9%). Conversely, spending on housing and utilities decreased by 4.8% year-on-year, following a 4.9% decline in April, alongside lower prices for furniture, household appliances, and maintenance (down 1.9% after a 1% drop the previous month). Transport prices saw a slight acceleration, rising 0.5% in May compared to a 0.1% increase in April, while communications costs edged up to 4.1% from 4.0%.

May's figures also indicated a slight easing in service price inflation to 5.7% from 5.9% in April, slightly below market expectations for a larger decline to 5.5%. These indicators are closely watched by the Bank of England for insights into medium-term inflationary risks.

Core inflation, which excludes volatile items like food and energy, fell to 3.6% in May from 3.9% in April, marking its lowest level since October 2021. However, it remains above the Bank of England's 2% inflation target.

Despite the favorable inflation data for May, analysts do not anticipate a shift in the Bank of England's stance at its upcoming meeting, where the central bank is expected to maintain its key interest rate at 5.25%. Financial markets still suggest that the first rate cut in the UK could occur in September or October, based on current economic trends and inflation forecasts.