Inflation has finally reached its 2% target after nearly three years.
- Food prices have played a significant role in this decrease, falling from 2.9% in April to 1.7% in May.
- Despite these promising figures, the average shopping bill remains 25% higher than in early 2022.
- Recreation, culture, and household goods contributed to the downward trend, but transport costs increased.
- While the news is positive, core inflation and interest rates suggest that challenges remain.
For the first time in almost three years, the Bank of England has achieved its desired 2% inflation target. Food prices, which had been a significant burden, fell from 2.9% in April to 1.7% in May, according to the Office for National Statistics (ONS). This decrease was a major factor in bringing inflation down.
However, it’s essential to note that while this is good news, the cost of a weekly shop is still up compared to the previous year. The average shopping bill is more than 25% higher than at the beginning of 2022. Despite improvements, the damage from last year’s peak inflation rate of over 19% lingers.
Capital Economics has observed that food-producer price inflation was at a mere 0.2% in May. The forecaster predicts that food-price inflation might soon drop to zero. Meanwhile, other sectors like recreation, culture, and household goods have also seen price reductions, although transport costs increased.
The Consumer Prices Index (CPI) for all goods dropped by 1.3% in May, marking the steepest decline in nearly eight years. Despite this positive development, household budgets remain strained from the recent inflation spike, which peaked at just above 11% in 2022. Nevertheless, the UK’s inflation rate is now the second lowest in the G7, following Italy.
Examining the impact on interest rates and mortgage payments reveals less optimistic news. Core inflation, excluding volatile items like food, fuel, and tobacco, dropped from 3.9% in April to 3.5% in May. Although this is a significant improvement, it remains elevated and will undoubtedly influence the Bank of England’s decisions regarding future interest rates.
The all-services index, which comprises 80% of the UK economy, rose by 5.7% in May. This was a slight decrease from April’s 5.9% but still higher than anticipated. The link between service prices and wage settlements is noteworthy, as pay increased by 5.9%, contributing to concerns voiced by the Bank’s Monetary Policy Committee (MPC).
While the Bank of England is under purdah due to the ongoing election, it is unlikely that the base rate of 5.25% will change soon. Some members, like Swati Dhingra and Dave Ramsden, have called for an early reduction, but current forecasts suggest that any cut will not occur until at least September.
Market reactions indicate scepticism about an imminent rate cut. Although the pound strengthened, signalling a lack of optimism for early reductions, any future cuts could aid borrowers with mortgages linked to base rates and improve market sentiment.
In conclusion, while inflation has reached its target, the underlying economic pressures and financial challenges remain significant.