UK achieves 2 percent inflation target

Inflation in May finally returned to the Bank of England’s 2 percent target on Wednesday in what will be welcome news for the Conservative government as it struggles in the polls.

Prices for goods and services in Britain rose by 2 percent year-on-year in line with analysts’ forecasts.

On a month-on-month basis, inflation held constant compared to a 0.3 percent rise last month, the Office for National Statistics said Wednesday.

The cost of services, a key metric that is closely watched by the Bank of England, however, slightly missed analysts’ expectations, coming in at 5.7 percent on the year versus market expectations of 5.5 percent.

The Bank’s Monetary Policy Committee will meet on Thursday, where, due to the proximity of the upcoming election, it is all but certain to keep rates unchanged at 5.25 percent to not influence the political outcome of the election.

In an interview on Sky News, U.K. Secretary of State for Work and Pensions Mel Stride said the government could take credit for hitting the target because it had implemented the right fiscal policy, and not, for example, given in to “above-inflationary pay demands.”

“We had to take the right choices, the tough choices, make sure that we got inflation down,” said Stride.

Deutsche Bank’s U.K. chief economist Sanjay Raja told POLITICO that despite inflation hitting the 2 percent target, it won’t necessarily be smooth sailing for the Bank of England from now on.

“On the surface, this is good news after 33 consecutive months of above-target [inflation],” Raja said. At the same time, he warned that with services inflation coming in higher than expected, the gap between the Bank’s expectations and the actual data had widened, suggesting price increases in this category may struggle to slow. 

“This, we think, will raise the bar for an August rate cut… For now, markets have pared back rate cut bets this year,” he said.

Pandemic-era dislocations brought inflation to the highest in decades, peaking at 11.1 percent in October 2022. It has been above the Bank’s 2 percent target for over three years now.

The state of the U.K. economy has been a central issue for the Conservative and Labour parties in advance of the July 4 election.

After this Thursday’s meeting, the Monetary Policy Committee will meet again in August, when it may decide to cut rates.

If the polls are correct, the Labour Party will be in Number 10 by then.