Inflation latest: Interest rate cut hopes fall away amid one concerning figure - despite inflation dropping to target (2024)

Inflation returning to the 2% target is unquestionably positive news - memories are still fresh of 11.1% price rises noted in October 2022's peak.

While nothing like that is expected again any time soon - unless there is a major global shock - the Bank of England has been making noises for a while that it does expect inflation to tick up again later this year.

This could contribute to caution from the Bank in cutting interest rates.

Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, said the Bank should be wary of inflation "rebounding" from June onwards.

"Given that today's data indicates that core inflation remains elevated, this rebound might be sharper than expected," she said.

Analysts at Pantheon Macroeconomics see inflation approaching 3% again as we near winter 2024.

They said this morning: "We expect inflation to hold at 2% in June and then to rise to 2.9% by November.

"Food and non-energy goods inflation have no further to fall now they have converged to producer output price inflation.

"Meanwhile, Ofgem will likely hike the utility price cap by 12% in October after wholesale energy costs have risen.

"We look for CPI services inflation to fall only to 4.8% at the end of 2024."

By Daniel Binns, business reporter

The value of the pound initially shot up this morning following news that UK inflation eased in May to the Bank of England's target of 2%.

However, sterling has since eased back slightly after it emerged that services inflation - which covers sectors such as the hospitality industry - was stickier than expected.

It fell to 5.7% in May, less than forecast, prompting predictions the Bank of England might now delay cutting interest rates until September, rather than August as previously thought.

The pound is currently up almost 0.2% against the US dollar, with £1 buying $1.27. Sterling is up a similar level against the euro, with £1 buying €1.19.

A rise in the pound is good for British holidaymakers and importers as their money goes further.

Meanwhile, the FTSE 100 and 250 are both down slightly amid the new rate cut speculation.

Ben Laidler, a markets strategist from eToro, said: "Markets are seeing a bit of indigestion on the details of the inflation report pushing back expectations of a first rate cut."

Top gainers this morning include Vodafone, which is up nearly 1.2% after it sold an 18% stake in Indian telecoms firm Indus Towers for €1.7bn (£1.4bn).

One of the biggest fallers is scientific instrument and equipment firm Spectris, which is down more than 8% on the FTSE 250 on Wednesday.

It comes after the company warned of lower-than-expected profits amid weak demand from China.

Meanwhile, the cost of oil is continuing to creep up, with a barrel of Brent Crude priced at almost $85 (£67) this morning.

Inflation falling back to 2%, the magic number as far as the Bank of England and the increasingly desperate Conservative election campaign are concerned, is unequivocally welcome news.

It has been a long road down from the peak of 11.1% in October 2022 and a great deal of hardship has been felt along the way.

The return to earth poses questions for the Bank of England, the government, both current and future and, most importantly, in the real world, where households are desperate for relief from relentless cost pressures.

The most immediate issue is for the Bank, whose Monetary Policy Committee meets today to ponder a decision on interest rates that will be communicated at midday tomorrow.

Even with the CPI rate normalising, no one expects a cut from the current 5.25%. While the headline rate has been reined in, primarily by food prices rising more slowly than a year ago, inflation for all services remains at 5.7%.

This is precisely the sort of "sticky" above-target domestic inflation the Bank has always feared would linger after energy price shocks fell away, and the reason it forecasts the rate will actually rise in the second half of the year.

Analysts believe that far from hastening a cut at the next meeting in August this may push the likelihood back to September, prolonging the discomfort for homeowners coming off fixed rates and those trying to buy or move.

There may also be an electoral factor, with the Bank reluctant to do anything that might play into a febrile environment in which the government claims full credit for falling inflation while the opposition points to the damage left in its wake.

Having been accused of moving too slowly to increase rates, governor Andrew Bailey is in no danger of being charged with moving too fast to bring them down.

For Rishi Sunak and his faltering campaign the news is a fillip entering the final fortnight before polling day. He will claim the credit for the one pledge that has unarguably been met.

Given the influence of external factors, primarily the war in Ukraine, and role of the central bank whose job it is to keep rates in check, how much he can claim for not pursuing policies that would have made it worse is moot.

For Keir Starmer and Rachel Reeves, hoping to become the next prime minister and chancellor in 16 days, there is good news too, though they won't let it show for now. They may be moving into Downing Street at the turning of the economic tide.

Given their reliance on growth to make manifesto pledges even remotely add up with required public spending, they will be praying that is the case.

And what of the real world? Away from Westminster and Threadneedle Street, no statistic, even one as important as inflation, will bring overnight relief.

Real prices for food, energy, clothing and rents are all around 20% higher than they were three years ago and for some mortgage repayments have doubled. That has been deeply corrosive for household incomes, increased Britain's already troubling inequality, and taken a toll on the health and wellbeing of the people the economy relies on to get back to work.

For the first time British households are poorer in real terms at the end of a parliament than they were at the start in 2019.

In line with our last post, market expectations of an imminent interest rate cut have now fallen away.

Though inflation has dropped to target, services inflation came in higher than anticipated.

High wage growth is also a concern for the Bank of England.

The next base rate decision is tomorrow - followed six weeks later in August and then September.

The last of these now looks most likely for a cut from the 16-year-high of 5.25% down to 5%.

Market expectations for rate cut have hardened this morning:

• Chance of a cut tomorrow now 5.34%, down from 10.59%
• Chance of a rate cut in August now 34.5%, down from 42.2%
• Chance of a rate cut in Sept now 75.2%, down from 79.6%

There's plenty to cheer following May's inflation figures - but there's one number that is concerning economists looking at the timing of an interest rate cut.

Interest rates have been raised and kept high to squeeze the economy - when people spend less and save more, price rises (inflation) tend to slow.

In theory, the fall to target inflation of 2% should fire the starting gun on rate cuts from 5.25%.

However, experts at Capital Economics say the fall from 2.3% in April to 2% in May "probably" won't be enough to persuade the Bank of England to cut interest rates from 5.25% tomorrow.

We expected this, as wage growth is still higher than the Bank sees as ideal - and there are concerns inflation will tick up again later this year.

Also, business presenter Ian King says the Bank would be reluctant to act during an election campaign.

Many instead predicted a base rate cut in August, but economists are now worried about that date too.

"With services inflation nudging down only slightly, this leaves our forecast that the Bank will cut rates for the first time in August looking a little shakier," Capital said.

Both the Bank itself and Capital Economics predicted that services inflation would drop from 5.9% to 5.3% - however, it only dropped to 5.7%.

"As a result, today's release won't alleviate the Bank's concerns about persistent price pressures entirely," Capital concluded.

Pantheon Macroeconomics, another industry-leading research firm, agrees.

"The good news is headline inflation has fallen back to the 2% target for the first time since July 2021," it said in its reaction report.

"The bad news is services inflation has proved remarkably persistent, slowing only to 5.7% in May from 6.1% in February, a period when large base effects should have weighed heavily on the year-over-year inflation rate."

With that in mind, Pantheon described the notion that the Bank would cut interest rates in August as "a longshot".

"Services inflation overshooting the MPC's forecast by 40bp makes an August MPC rate cut look like a longshot. We will very likely shift our call for the first MPC cut to September, followed by another in November."

But Pantheon emphasised the headline today is good news.

"Among these repeated upside services inflation surprises it's easy to to miss the big picture that headline inflation has returned to the target, and even if CPI inflation rises it will remain below 3%," Pantheon said.

"This is a far cry from the conditions in place when the MPC raised Bank Rate to 5.25%."

Rishi Sunak says inflation falling to target is "great news" - but warned it could rise again if Labour wins on 4 July.

The prime minister said: "Great news this morning that inflation is back to normal at 2%.

"That's lower than Germany, France and America.

"When I became prime minister, inflation was at 11%.

"But we took bold action. We stuck to a clear plan and that's why the economy has now turned a corner.

"So, let's not put all that progress at risk with Labour. All they would do is spend a load of money, push up inflation and cost every working family £2,000 in higher taxes."

Labour has rejected the Tory claim that it is planning £2,000 of tax rises - and analysts say using the same methodology shows taxes would also rise under the Conservatives.

Chancellor Jeremy Hunt added: "It is welcome news that inflation has returned to the Bank of England's 2.0% target for the first time in three years, lower than in Europe and the United States - because we stuck to the plan.

"There is more to do but with inflation back under control, the last thing families need now is an unaccountable Labour government with a big majority putting up council tax and other taxes by at least £2,094."

This table shows the annual rate of inflation for various services and goods.

You'll see prices are still rising in almost every sector (though not housing costs ie energy and furniture) - but less, in most cases, in May than April.

As you can see, food and non-alcoholic beverages experienced a heavy drop in the rate of price rises - they were rising 2.9% and now they're rising 1.7%.

The only significant increase in the rate of price rises was in the transport sector - they're rising at a rate 0.4% higher in May.

Clothing and footwear also dropped (by 0.7%) and the communication sector saw a very slight increase (0.1%).

We'll be bringing you the drivers behind today's drop to 2% very shortly.

The UK economy is hailing the return of inflation to the 2% target. For the Conservatives this will be proof their economic plan is working. But Labour is warning that, after 14 years of "economic chaos", today's news isn't a reason to choose the Tories when the country goes to the ballot box on 4 July.

Shadow chancellor Rachel Reeves says the Conservatives' "desperate wish list of unfunded spending promises" will mean more expensive mortgages.

Ms Reeves said: "After 14 years of economic chaos under the Conservatives, working people are worse off. Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.

"Labour has a plan to make people better off bringing stability back to our economy, unlocking investment and delivering reform.

"All the Conservatives are offering is a desperate wish list of unfunded spending promises that will mean £4,800 more on people's mortgages."

Liberal Democrats' treasury spokeswoman Sarah Olney agrees with Ms Reeves, calling it "sheer desperation" from the Conservatives to claim their plan for the economy is working.

"The hard truth is that millions of people won't be feeling any better off today, thanks to years of Conservative economic mismanagement," she said.

"Rishi Sunak's boasts will ring hollow to countless families seeing their mortgages skyrocket and agonising rises in shopping prices compared to just a few years ago."

The pound rose slightly versus theeuro and dollar on the back of the 7am announcement.

The euro dropped 0.04% to 84.46p againstthe pound from 84.48p right before the data.

Sterling wasup 0.05% against the dollar at $1.2713, having tradedat $1.2704 earlier.

This is all positive for holidaymakers and importers - as their pound will go further.

This morning's figures will be welcome reading for many of us - but how do we compare with other major economies?

The UK is now in line with the US, one of the world economies which has best been able to manage global inflation, and is performing better than much of Europe.

France and Germany sit at 2.6% and 2.8% respectively, with the wider Eurozone between them at 2.7%.