The rate of inflation has finally fallen back to its 2% target for the first time in almost three years.
Latest data from the Office for National Statistics (ONS) show that the Consumer Prices Index (CPI) the headline measure of inflation, rose by 2.0% in the year to May, down from 2.3% in April. That was in line with City expectations.
The return to the target represents a major symbolic victory for the Bank of England after a long struggle to contain the inflationary surge unleashed by the end of Covid restrictions followed by the energy price surge after the full scale invasion of Ukraine in February 2022.
It will also be a boost for Rishi Sunak in the last two weeks of the election campaign.
CPI inflation was last at 2% in July 2021 but rose rapidly after that to peak at a 41 year high of 11.1% in October 2022 before slowly easing. The Bank was forced to hike interest rates to a 16 year high of 5.25% by August last year, a level they have stayed at ever since.
Hitting the 2% target is still unlikely to persuade the Bank’s Monetary Policy Committee (MPC) to vote for a rate cut at its meeting tomorrow, but a move in August now looks more likely.
The long spike in inflation ushered in a cost of prolonged living crisis that has seen living standards tumble and had a devastating impact on Rishi Sunak’s poll ratings.
Analysts Kantar said yesterday that supermarket inflation has fallen back to 2.1%, the lowest since June 2022.
Today the ONS said prices of food and non-alcoholic beverages rose by only 1.7% in the year to May, down from 2.9% in the year to April. The May figure is the lowest annual rate since October 2021.
The rate has eased for the 14th consecutive month from a recent high of 19.2% in March 2023, the highest annual rate for over 45 years.However there will some concern at the MPC that the closely watched CPI services annual rate only fell from 5.9% to 5.7%.David Murray, financial planning expert at abrdn said: “After a drop to the lowest inflation level since 2021 last month, another dip to 2% is the news many have been longing for, for some time.
“While there are always winners and losers, across the board, longer-term low inflation brings with it stability and affordability that will benefit millions of people who have struggled to grapple with a high cost of living.
“With inflation now at 2%, naturally people will be prompted to question whether interest rates will follow suit and finally start to decline. Although the Bank of England has made it clear that it needs to see inflation get low, and stay low before it can cut interest rates, so today’s announcement is further justification for this to bear fruit.”
