- Inflation hits 2% target for the first time in 34 months
- Food prices lead the charge, dropping in May
- Bank of England interest rate cut still unlikely tomorrow
Laura Suter, director of personal finance at AJ Bell, comments on the latest UK inflation figures:
“Inflation has finally hit the Bank’s target of 2%, for the first time in almost three years. CPI inflation dropped once again in May, as food prices helped to push the headline rate down. The drop today down to 2% ends 34 long months of above-target inflation and brings price increases back to a much more palatable level.
“The figure will be heralded by Rishi Sunak on the campaign trail as vindication of the policy setting moves that the Conservatives have made over the past few years. In reality, much of the leg work was done by the Bank of England, with the government being very limited in how much they control inflation – but that’s unlikely to stop them from doing a bit of glory-stealing.
“Food prices actually fell in May, with the price of essentials like bread, cereals, vegetables and even chocolate dropping. This month’s fall compares to a chunky rise in food costs a year ago, which helped to pull the inflation rate back down. However, we’re still paying more for food and drink than we were a year ago – and the overall food basket is still much more expensive than at the start of the cost of living crisis.
“Elsewhere, we saw the price of a variety of items dropping, from a new fridge-freezer and vacuum to the cost of a new pet or the latest bestselling book. Across the spectrum people are starting to see prices drop in certain areas. There’s no escaping the fact that many prices are still rising – but the easing in some sectors is a welcome move in the right direction.
“But the cumulative effect of all the price rises, plus the big impact of increases in rent or mortgage costs, and the higher personal tax burden over the past few years means it’s unlikely many people are feeling the benefit of inflation hitting target just yet. A pertinent factor that many will be taking to the ballot box next month.
“Inflation hitting target means many will be expecting a cut to interest rates at the Bank’s meeting tomorrow. However, it would be very unlikely for the ratesetters to cut interest rates during an election campaign. The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up. It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.”
