The United Kingdom (U.K.)’s headline inflation rate fell to 2 percent year-on-year (YoY) in May 2024, hitting the Bank of England (BoE)‘s target for the first time since July 2021, just ahead of the central bank’s June policy meeting. This marks the lowest annual increase in the consumer price index since mid-2021, in line with analysts’ forecasts.
Monthly inflation uptick misses expectations
On a monthly basis, inflation rose by 0.3 percent in May 2024, consistent with the prior month but slightly below economists’ expectations. The U.K.’s CPI inflation rate was lower than France (2.6 percent), Germany (2.8 percent), and the EU average (2.7 percent), and matched the U.S. (2.0 percent) over the 12 months to May 2024.
Drivers of inflation decline
The decline in annual inflation in May 2024 was driven by easing in food and non-alcoholic beverages, recreation and culture, and furniture and household goods prices. However, transport and communication provided the largest upward pressures.
Core inflation cools but remains elevated
Excluding volatile food, energy, alcohol, and tobacco items, core inflation increased by 3.5 percent YoY, down from 3.9 percent in April and meeting expectations. This represents the lowest core inflation rate since October 2021. On a monthly basis, core inflation rose by 0.5 percent, slowing from 0.8 percent in the prior month.
Services inflation moderates slightly
Services inflation recorded a 5.7 percent YoY gain and a 0.6 percent month-over-month increase, slightly down from the previous 5.9 percent and 0.8 percent respectively, but overall a little higher than expected. Concurrently, the annual increase in producer prices accelerated to 1.7 percent in May 2024, the fastest pace in a year.
Muted market reaction, no imminent BoE cuts
The mixed inflation report has not triggered significant market reactions, suggesting limited near-term prospects for Bank of England rate cuts. The central bank is expected to keep its Bank Rate unchanged on Thursday, likely in a 7-2 vote split, and maintain consistent policy guidance.
Analysts divided on timing of BoE easing
Currently, markets are pricing in a negligible chance of any policy action in June, with expectations of a 10 basis point cut by August, 18 basis points cumulatively by September, 31 basis points by November, and 41 basis points by year-end.
Analysts remain divided on the timing of potential BoE rate cuts, with Deutsche Bank holding on to its prediction for an August move, while UniCredit anticipates a slightly more dovish 6-3 vote split at the next meeting, although considerable uncertainty remains.
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