Inflation returned to the two per cent target in May for the first time since July 2021 as markets prepare for the Bank of England’s latest interest rate decision tomorrow.
Prices just rose 2.0 per cent in the year to May, according to the Office for National Statistics (ONS), down from 2.3 per cent in April. This was in line with economists’ expectations.
Core inflation, which strips out volatile components such as food and energy, fell to 3.5 per cent, down from 3.9 per cent previously.
Even though inflation has returned to the two per cent target, the Bank of England is very unlikely to cut interest rates tomorrow.
Policymakers at the Bank are cautious of lowering rates when there are still signs of inflationary pressures in the domestic economy.
Figures out last week showed that annual wage growth in the private sector was running at around 5.8 per cent, nearly twice the level consistent with the two per cent inflation target.
The Bank is also expecting to see a slight uptick in inflation later in the year as the downward drag from falling energy prices starts to wane.
Without a compelling case for lowering rates, the Monetary Policy Committee (MPC) is also likely to be cautious of changing policy during an election campaign.
MPC members have been prevented from making speeches during the campaign, making it more difficult for markets to gauge how rate-setters are interpreting incoming data.
However, the data will likely influence the guidance issued by the Bank tomorrow. Traders put the odds of an August interest rate cut at about 50/50.
More to follow