By Ed Frankl


U.K. inflation declined to the Bank of England's target in May, increasing the likelihood that will lower its key interest rate in the coming months and presenting a rare piece of good economic news for Prime Minister Rishi Sunak ahead of next month's election.

Consumer prices were 2.0% higher than the same month of 2023, cooler than the 2.3% recorded in April, and marking the fourth fall in as many months, the Office for National Statistics said Wednesday.

It is the first time inflation has reached the BOE's 2% target since July 2021, before the unwinding of many of the restrictions imposed during the Covid-19 pandemic and the surge in energy prices prompted by Russia's full-scale invasion of Ukraine.

While welcome, the decline in inflation since the middle of 2023 has been driven primarily by energy prices, which have tumbled on global markets. Policymakers at the BOE worry that when they level out, overall inflation will be driven higher by prices that are mainly responding to domestic pressures, including rapidly rising wages.

Services inflation came in at 5.7%, easing only a little from the 5.9% rate recorded in April. The core inflation rate, which excludes volatile energy and food prices, was 3.5% compared with economists' expectations of 3.4%.

The data will keep the central bank's policymakers on their toes ahead of their next meeting on Thursday. Investors expect they will hold the key rate at the current 16-year high of 5.25%, before cutting later in the year if there are further signs that services prices are cooling.

The stage is set for a rate cut in August, even though domestic price pressures--such as elevated pay growth--are proving slower to come down than headline inflation according to Martin Sartorius, principal economist at the Confederation of British Industry business lobby group.

"This means that they are likely to move cautiously beyond August to avoid putting further upward pressure on inflation, especially as the growth outlook improves at home and geopolitical tensions remain heightened," he added.

The BOE said in May that after dropping to 2% it expects inflation to creep up again in the second half of this year. The European Central Bank also expects the return of inflation to its 2% target to be "bumpy", but was confident enough about reaching its goal to lower its key interest rate on June 6.

By contrast, Federal Reserve Chair Jerome Powell last week offered little encouragement for the view that U.S. rate cuts would come soon, and many investors don't expect a move before December.

For British households, the decline in inflation from a peak of 11.1% October 2022 is good news, and with wages increasing more rapidly than prices, their spending power is on the rise again.

Policymakers have suspended public comments on the economy since May 22, when Prime Minister Sunak called a surprise election.

The prime minister has campaigned on an improving economy, frequently asserting that inflation has returned to normal. However, his Conservative Party trails significantly in the polls to the opposition Labour Party.


Write to Ed Frankl at edward.frankl@wsj.com


(END) Dow Jones Newswires

06-19-24 0249ET