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UK Inflation Hits Bank of England's 2% Target

UK Inflation Hits Bank of England's 2% Target

UK Inflation Hits Bank of England's 2% Target

The UK announced its latest inflation data, revealing significant changes in the economic landscape. The Consumer Prices Index (CPI) rose by 2.0% in the 12 months to May 2024, a decrease from 2.3% in April 2024. This marks a significant milestone as the inflation rate hits the Bank of England's target of 2% for the first time in nearly three years. The Consumer Prices Index including owner occupiers’ housing costs (CPIH) also saw a decline, rising by 2.8% in the 12 months to May 2024, down from 3.0% in April 2024.

Core Inflation and Sector-Specific Trends

Core inflation, which excludes volatile items such as food and energy, fell to 3.5% in May 2024 from 3.9% in April 2024. This decline aligns with market expectations and indicates a reduction in underlying price pressures. Sector-specific inflation data showed varied trends: prices for food and non-alcoholic beverages rose by 1.7% in the year to May 2024, down from 2.9% in April 2024, making this sector the largest downward contributor to the overall inflation rate. Recreational and cultural goods and services saw prices increase by 0.2% between April and May 2024, compared to a larger rise of 0.7% in the same period last year. Furniture and household goods prices rose by 0.2% between April and May 2024, a smaller increase compared to 1.1% in the previous year. Transport prices rose by 0.3% in the year to May 2024, compared to a fall of 0.1% in April 2024.

Persistent Pressures in Services Sector

Services inflation remains a concern, recording a 5.7% year-over-year rise in May 2024. This rate is higher than the headline CPI and indicates persistent inflationary pressures in the service sector. Comparatively, the UK's CPI inflation rate of 2.0% is lower than that of France (2.6%), Germany (2.8%), and the EU average (2.7%), and matches the US rate. This comparative analysis highlights the UK's relative success in managing inflation compared to its European counterparts.

Bank of England's Policy Outlook

The Bank of England is expected to maintain its current interest rate of 5.25% in the immediate term, with potential rate cuts anticipated later in the year. Market expectations suggest a negligible chance of policy action in June, with more significant adjustments likely by September or November. Despite the fall in inflation, wages are increasing significantly more than inflation, which could help improve living standards. However, the recent period has been described as one of the worst for living standards in modern times. House prices in the UK rose for the second consecutive month in April 2024, and average private rents increased by 8.7% in the 12 months to May 2024.

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