UK inflation remained unchanged at 2.0% in May, according to figures released by the Office for National Statistics (ONS). This steady rate matches the previous month's figure and brings the Consumer Price Index (CPI) back to the Bank of England's official target for the first time in nearly three years. The data comes just a day before the central bank is due to announce its latest decision on interest rates, intensifying scrutiny on its monetary policy stance.
Economists had widely anticipated inflation to hold at 2.0%, following April's drop from 2.3%. While the headline rate has reached the target, underlying price pressures remain a concern for policymakers. Services inflation, a metric closely watched by the Bank of England for signals of persistent domestic price pressures, eased slightly to 5.7% in May, down from 5.9% in April. This moderation, although modest, could offer some reassurance to the Monetary Policy Committee (MPC).
The ONS data showed that the largest downward contributions to the monthly change in inflation came from food and non-alcoholic beverages, where prices fell by 0.3% in the year to May. Recreational and cultural goods and services also contributed to the stability. Conversely, motor fuels saw an upward contribution, with petrol prices rising by 2.2 pence per litre between April and May 2024, compared with a fall of 6.5 pence per litre during the same period last year.
The Bank of England's MPC has maintained the base interest rate at a 16-year high of 5.25% since August 2023, prioritising the fight against inflation. While the headline figure now aligns with their target, the MPC will be assessing a broader range of economic indicators, including wage growth and services inflation, before considering any cuts. The steady inflation figure may not be enough on its own to trigger an immediate rate reduction, given the Bank's cautious approach to ensure inflation is sustainably brought under control.
The FTSE 100 index saw a muted reaction following the inflation announcement, as the data largely aligned with market expectations. Investors are now firmly focused on the Bank of England's upcoming decision, with many analysts suggesting that while a rate cut this month is unlikely, the door could be opening for a reduction later in the summer, potentially in August, if other economic data continues to show a cooling trend.
For UK businesses, particularly those reliant on consumer spending, stable inflation could signal a more predictable economic environment. However, the persistent cost of borrowing, due to the high interest rates, continues to impact investment and expansion plans. Smaller businesses, in particular, often feel the pinch of elevated borrowing costs more acutely than larger corporations.
Source: Office for National Statistics (ONS)