UK inflation dropped to 2% in May, meeting the Bank of England’s target for the first time in nearly three years, largely due to easing food prices. Despite this positive news, services inflation remains high, with prices for haircuts, hotels, and restaurants still rising too quickly.
As a result, the Bank of England is expected to maintain current interest rates in their upcoming meetings. Services inflation stood at 5.7% in May, down slightly from 5.9% in April, indicating persistent domestic price pressures.
Economists like Zara Noakes from JPMorgan Asset Management assert that these conditions make an August rate cut unlikely. However, some, including analysts at Nomura, believe a rate cut could be possible if pay rises and service prices cool further.
The Bank of England had raised its benchmark interest rate to 5.25% last August in an effort to combat high inflation, which peaked at 11.1% in October 2022. Despite the easing inflation, many UK residents still face high living costs, a significant concern as they prepare to vote in the upcoming general election on July 4.
Economist Jake Finney from PwC UK warns that inflation could exceed the 2% target again if current price trends continue, highlighting that the fight against inflation is far from over. This mirrors trends in the US and Europe, where inflation remains stubbornly high despite rate cuts by the European Central Bank.
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