UK inflation fell to 2% in May, returning to the official target rate for the first time in nearly three years.
In a boost to the Bank of England’s efforts to bring down the consumer prices index, the Office for National Statistics (ONS) said price pressures eased between April and May.
Lower prices growth will also boost Rishi Sunak after the prime minister made bringing inflation under control one of his main aims. The release of the inflation figures represents the one of the last significant economic indicators before the general election on 4 July.
Sunak said the fall in inflation was “great news” and meant consumer prices were rising at a slower rate than Germany, France and the US.
“When I became prime minister inflation was at 11%. But we took bold action. We stuck to a clear plan and that’s why the economy has now turned a corner,” he said.
Rachel Reeves, Labour’s shadow chancellor, said inflation under the Conservatives had left “working people worse off”. She added: “Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.”
The TUC general secretary, Paul Nowak, said the recent fall in inflation masked three years when “UK families have suffered the highest prices rises in the G7 – with inflation going up more over that period than it usually does over an entire decade”.
The fall in inflation was in line with predictions from City economists and it is the first time inflation has hit the Bank’s 2% target since July 2021.
The Bank is expected to keep interest rates at 5.25% when it publishes its decision on Thursday.
Until recently financial markets were betting the Bank would make its first cut in the cost of borrowing at a meeting in November. Investors now expected the first cut in September and a further cut in December.
The Bank’s monetary policy committee (MPC) aims to keep inflation at about 2% but has forecast a rise later in the year back towards 3% before a fall again next year to 2%.
Figures from the ONS showed the rising cost of food and beverages eased along with furniture and the price of household goods.
Analysts said the high level of core inflation, which excludes volatile items such as food and fuel, would be concerning to the central bank.
Core inflation was 3.5% in the 12 months to May, down from 3.9% in April. The rising price of services, which eased from 5.9% to 5.7%, was one of the main factors keeping core inflation elevated.
Service industries have complained that they experienced increased IT and labour costs, which they were forced to pass on to consumers. Average wages excluding bonuses rose by 6% in the three months to the end of April.
Sanjay Raja, the chief UK economist at Deutsche Bank Research, said services inflation was “the key gauge watched by policymakers” and there was a widening gap with the central bank’s forecasts.
“The wedge between the Bank’s projection and actual data widened a little more, adding to concerns that services prices may be a little stickier than anticipated. It will raise the bar for an August rate cut.”
Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, said: “Given that today’s data indicates that core inflation remains elevated, this rebound might be sharper than projected. As a result, we expect the MPC to exert caution at its upcoming meeting and hold interest rates, despite today’s encouraging fall in the headline rate.”
However, the Confederation of British Industry said a cut in the cost of borrowing was likely in August, despite stubbornly high services inflation.
The business lobby group’s principal economist, Martin Sartorius, said: “Today’s data sets the stage for the MPC to cut interest rates in August, in line with our latest forecast’s expectations.”
In May last year, inflation rose by 8.7%, down from more than 11% in October 2022, the highest rate in more than 40 years.