Inflation has returned to the Bank of England’s 2% target for the first time since July 2021.
Measured by the consumer prices index (CPI), which rose by 2% in the 12 months to May 2024, it is down from 2.3% in the 12 months to April.
The biggest downward contribution to the fall in inflation came from food-price inflation, which dipped to 1.7% in May, the lowest annual rate since October 2021. This was partially offset by higher petrol prices.
The UK has also won the international race to get back to target, being the first among the euro area and US to bring headline inflation back down to 2%. In fact, the UK currently has the lowest headline inflation rate in the G7 bar Italy.
Despite this, the impacts of sustained high inflation over the past three years will remain for some time, with the relative cost of essential goods expected to remain high.
The Resolution Foundation notes that overall prices have risen by 22% since July 2021 (when inflation was last at 2%), while energy prices have risen by 66% and food by 31%.
Core inflation, meanwhile, which takes out volatile factors like energy, food, alcohol and tobacco to give a clear picture of underlying trends, rose by 3.5% in the 12 months to May 2024, down from 3.9% in April.
James Smith, Research Director at the Resolution Foundation, said: “It’s very welcome to see headline CPI inflation falling back to its 2 per cent target for the first time since July 2021. And while the UK experienced a higher inflation peak during the cost-of-living crisis, it has now got back to target more quickly than either the US or euro area.
“But the legacy of a long period of very high inflation means there is unlikely to be much of a feel-good factor among families, as they continue to struggle with the higher cost of essentials.
“And while headline inflation is back to normal levels, domestically-driven services-price inflation remains elevated. This inflation will worry the Bank of England, and may give pause for thought when it comes to cutting interest rates.”
“Inflation returns to target, but Bank of England is unlikely to fire starting gun on interest rate cuts tomorrow,” noted Yael Selfin, Chief Economist at KPMG UK.
“The Bank of England will be encouraged by the slowdown in headline inflation, and while concerns will remain over elevated underlying price pressures, further falls in services inflation are anticipated over the coming months. Today’s data are unlikely to spur a surprise rate cut tomorrow, however, the MPC could have sufficient evidence to begin its easing cycle in August.
“While underlying price pressures have moderated somewhat, they remain uncomfortably high, with services inflation running at 5.7%. The Bank will need to see a continued fall in services inflation before it can be confident that headline inflation will stay sustainably at its 2% target in the medium term. A slower pace of pay rises may lead to weakening services inflation, helped by a loosening labour market.
“Energy prices continue to present a risk for the UK inflation outlook. Wholesale gas prices have risen by more than 30% since the start of April, and if prices remain at this level into the autumn, household energy bills could potentially rise again in October. Nevertheless, the overall outlook for inflation remains broadly positive, and we expect headline inflation to hover around the target range over the coming months.”
