The Consumer Prices Index is expected to have fallen to 2% in May, down from 2.3% in April, according to most analysts, as energy prices and food costs subside
Inflation is tipped to hit the Bank of England’s 2% target for the first time in almost three years, according to official figures set to be released on Wednesday.
This announcement comes just a day before the next interest rate decision. Most experts are predicting that the upcoming data will reveal the Consumer Prices Index (CPI) has fallen to 2% in May, a decrease from April’s 2.3%.
Should inflation drop to the central bank’s goal, it would be the first instance since July 2021, prior to the cost-of-living crisis which saw inflation soar to heights not witnessed in four decades.
Economists are sceptical about the likelihood of an early summer cut in interest rates. The consensus among financial analysts is that the Bank of England will maintain the current 5.25% rate on Thursday, with the impending election putting a damper on any hopes for a rate reduction before the country goes to vote on July 4.
Investec economist Sandra Horsfield commented: “Welcome though a return to target inflation would be, the MPC (Monetary Policy Committee) is unlikely to be fully satisfied should the numbers meet our expectations. In the (Bank’s) May Monetary Policy Report, the baseline forecast was for a 1.9% inflation rate. Nor it is clear that inflation will stay at 2% from now on In fact, we expect a small rise again over the second half of the year.”
Furthermore, she said that despite chances seeming slim for a rate reduction in June, due to the “amid a pre-election purdah period”, there’s still optimism for rates to be lowered by August. Although returning to their financial target holds symbolic importance, the Bank continues to keep a cautious eye on the stubborn inflation within the services sector, which has played a role in stalling any cuts to the interest rates from their record high in 16 years.
Focus has also been given to wage growth, which has maintained its resilience, causing financial markets to anticipate only a single rate cut throughout this year. Economists may view this as overly negative, but Robert Wood of Pantheon Macroeconomics asserts that the Monetary Policy Committee (MPC) “still has work to do”.
He anticipates that service sector inflation will exceed the bank’s own predictions once more in May, yet believes that they’ll overlook this imperfection by the time of the August decision when the next quarterly forecasts are released.
“We think the MPC will still cut Bank Rate for the first time in August, even if services inflation overshoots its forecast,” he proposed. “As long as services inflation keeps slowing, the next CPI print should give the MPC more confidence to trust surveys which suggest inflation will continue to ease.”
