Rishi Sunak has declared “we’ve got there” after inflation returned to the 2% target for the first time in nearly three years, but experts cautioned a summer interest rate cut was not a done deal.
In a symbolic moment for the UK economy after a painful cost-of-living crisis, official figures revealed that Consumer Prices Index (CPI) inflation fell to 2% in May, down from 2.3% in April, thanks largely to easing food price rises.
Rishi Sunak said it was “great news” and insisted the milestone showed the economy had turned the corner, ending nearly three years of above-target inflation.
CPI was last recorded at the 2% target in July 2021, before rocketing up amid a cost crisis that hammered households and businesses, at one stage reaching a 41-year high of 11.1% in October 2022.
The latest fall means that prices are still rising across the country, but at a much slower rate than in recent years.
Mr Sunak told LBC Radio: “It’s very good news because the last few years have been really tough for everybody … But we’ve stuck to a plan, we’ve taken the action needed, it wasn’t always easy, but we’ve got there, and inflation is back to target.”
But experts said that, while an important marker, it was not set to mean an imminent reduction to interest rates from the current 5.25%.
A cut on Thursday, when the Bank of England announces its next decision, is seen as being “off the table” given the General Election and some warned that stubbornly high inflation in the services sector could even put a reduction in August at risk.
Financial markets have cut bets on an August rate cut following the latest data, putting the chance at about 35%.
The data comes at a crucial time, less than three weeks before the July 4 polling day and as the political parties home in on economic pledges in their manifestos.
Chancellor Jeremy Hunt said he hopes the Bank will now cut interest rates so mortgage costs can come down.
He said: “Now we have inflation down, taxes starting to come down and, hopefully soon, mortgages coming down as well.”
The main parties seized on the figures to make political points, with Mr Sunak pledging to cut taxes further in light of the inflation falls and warning that inflation could rise again if Labour wins the General Election.
He told LBC: “It is because of that economic stability that we have restored, which was my priority when I got this job, that we have now been able to start cutting people’s taxes.
“If I win this election, I want to keep doing more of that.”
But shadow chancellor Rachel Reeves said: “After 14 years of economic chaos under the Conservatives, working people are worse off.
“Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.”
Liberal Democrat Treasury spokeswoman Sarah Olney said: “The hard truth is that millions of people won’t be feeling any better off today.”
Experts said that, despite the milestone for inflation, there is still work to do in bringing down prices throughout the economy.
The Bank is keeping a watchful eye on inflation in the services sector, which fell from 5.9% to 5.7% in May, but this was above forecasts as it remains stubbornly high.
It is one of the factors that has been partly responsible for staying the Bank’s hand in bringing rates down from their 16-year high of 5.25%.
Victoria Clarke, UK chief economist at Santander corporate investment bank, said: “We do not expect the Bank to cut rates tomorrow.
“Our base case has been for an August cut, but this will be reliant on these broader signals continuing to decisively soften over the next month’s data.
“As such, a risk of a later than August move is there, after today’s services print.”
Robert Wood, at Pantheon Macroeconomics, said higher services inflation could mean a rate cut is now pushed back until September.
But Peter Arnold at the EY Item Club said: “There’s a good chance the first rate cut will come in August, but the language of tomorrow’s MPC minutes will be an important guide.”
