For the first time since 2021, UK inflation is back on track

According to figures released on Wednesday, British inflation reached its 2% goal in May for the first time in over three years. However, because of persistently high underlying price pressures, the Bank of England is probably going to hold off on reducing interest rates.

Both Prime Minister Rishi Sunak and the Bank of England will be pleased with the decline in headline inflation in May, but it is probably too little, too late, to improve Sunak's prospects in the next election or to lead to a rate decrease by the BoE on Thursday.

The statistics indicated 5.7% inflation in services prices, which the BoE believes provides a more accurate picture of medium-term inflation threats. That was less than the 5.5% decline that analysts had predicted, but it was still down from 5.9% in April.

The annual consumer price inflation rate fell from April's 2.3% estimate to 2.1%, which was below the 41-year high of 11.1% recorded in October 2022 and in line with the consensus forecast of analysts surveyed by Reuters.

A year ago, there were worries that British inflation was abnormally sticky. However, the decline has been more dramatic than in the US or the eurozone, where consumer price inflation in May was 2.6% and 3.3%, respectively.

Nevertheless, during the last three years, consumer prices have increased by over 20%, which has squeezed living conditions and made Sunak's Conservatives unpopular. In fact, they are currently trailing the opposition Labour Party by about 20 points in opinion surveys.

The BoE has stated that it will not begin reducing interest rates until inflation returns to its objective.

Reducing rates from a 16-year high of 5.25% in August is what most economists surveyed by Reuters believe will happen, but financial markets believe a first move is more probable in September or October, with just a 10% likelihood of a decrease this week.

April's drop in regulated residential energy bills was the primary driver of the most recent decline in inflation; however, this effect will likely fade later in the year as the Bank of England predicts inflation to rise once again.

(Sources: investing.com, reuters.com)