UK Inflation Falls to 2% Target for First Time Since 2021

In May, UK inflation reached the Bank of England's 2% target for the first time since July 2021.

Prime Minister Rishi Sunak welcomed the drop in headline inflation, but it's unlikely to affect the upcoming elections or lead to an immediate interest rate cut by the Bank of England.

The Office for National Statistics reported that service price inflation, a key indicator for medium-term inflation risks, was 5.7% in May, slightly lower than April's 5.9%.

Despite forecasts of a decrease, economists expected 5.5%, while the Bank of England had predicted 5.3%.

The pound strengthened against the dollar and euro following the data, but British government bonds performed less favorably due to expectations that the Bank of England might delay rate cuts.

Analysts like Cathal Kennedy from RBC Capital Markets believe that high service CPI figures eliminate the chance of an immediate Bank Rate cut.

Annual consumer price inflation dropped from 2.3% in April to its lowest since July 2021, a significant decline from the peak of 11.1% in October 2022.

Unlike the Eurozone and the United States, where inflation rates were 2.6% and 3.3% respectively in May, UK inflation has seen a sharper decline.

Factors contributing to earlier inflation peaks included pandemic-related supply chain issues and increased natural gas costs following Russia's invasion of Ukraine.

Despite recent declines, consumer prices in the UK have risen over 20% in the past three years, impacting living standards and influencing political opinions ahead of the elections.