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UK Inflation Meets Bank of England's 2% Target Before Elections

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UK Inflation Meets Bank of England's 2% Target Before Elections

On June 19th, Office for National Statistics (ONS) reported May UK inflation report. In May, the United Kingdom's annual inflation rate dropped to 2%, reaching the Bank of England's target for the first time since July 2021, shortly before the bank's June meeting. This marks the final update of this crucial economic indicator before the national elections scheduled for July.

The UK's inflation data positions it ahead of both the US and the Eurozone in the effort to manage inflation. While the UK has met its inflation target of 2%, the US Federal Reserve and the European Central Bank continue to grapple with inflation rates that exceed their respective targets, aligning with the goals set by major central banks globally.

The headline inflation rate decreased from 2.3% in April to 2% in May 2024. The decline in inflation was driven lower by food and non-alcoholic beverages, recreation and furniture prices.

In May, the UK Consumer Price Index (CPI) increased by 0.3% month-on-month (MoM), matching the pace observed in April. However, this figure fell short of the anticipated 0.4% rise.

Shortly after the release, the pound sterling saw a slight increase, trading at $1.2721 as of 7:33 a.m. London time.

In May, services inflation, closely monitored by the Bank of England due to its significant impact on the UK economy and its reflection of domestically-driven price increases, stood at 5.7%, down from 5.9% in the previous month.

Core inflation, which excludes energy, food, alcohol, and tobacco prices, decreased to 3.5% in May from 3.9% recorded in April, although it remains at a relatively high level.

According to the Office for National Statistics (ONS), falling food prices were primarily responsible for the overall declines in inflation, while costs for car fuel continued to exert upward pressure.

In the year leading up to May 2024, prices of food and non-alcoholic beverages increased by 1.7%, a decrease from the 2.9% rise observed in the year to April. This marks the lowest annual rate since October 2021 and continues a trend of easing prices for the 14th consecutive month, following a peak of 19.2% in March 2023, which was the highest annual rate in over 45 years.

Between April and May 2024, prices in this category declined by 0.3%, contrasting with a 0.9% increase during the same period a year ago. Prices have remained relatively high but stable since early summer 2023, contrasting sharply with the significant rises seen over the previous 12 months. The annual inflation rate of 1.7% in May 2024 is notably lower than the 18.4% recorded in May 2023.

Focus on Bank of England's decision Related to Rate Cut

The May inflation report for the UK showed a varied outlook and did not provoke substantial market responses indicating an increased probability of a Bank of England rate cut.

Following the report, the British pound slightly strengthened to 1.2720 against the US dollar, while the euro slightly weakened to 0.8440 against sterling.

Gilt yields saw little change, with the 2-year gilt yielding 4.16% and the 10-year gilt yielding 4.04%.

Sources:

  1. Office for National Statistics
  2. CNBC

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