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UK CPI Inflation Cooled to 2.0% in May

UK CPI Inflation Cooled to 2.0% in May, FP Markets

UK CPI Inflation Data (May)

MM Headline: 0.3% (Est: 0.4%; Prev: 0.3%)

YY Headline: 2.0% (Est: 2.0%; Prev: 2.3%)

MM Core: 0.5% (Est: 0.5%; Prev: 0.9%)

YY Core: 3.5% (Est: 3.5%; Prev: 3.9%)

YY Services: 5.7% (Est: 5.5%; Prev: 5.9%)

UK CPI Inflation Hits BoE Inflation Target

According to the Office for National Statistics (ONS), UK CPI (Consumer Price Index) inflation softened to +2.0% in the twelve months to May, hitting the Bank of England’s (BoE) 2.0% inflation target for the first time since mid-2021 and highlighting a potential reduction in the Bank Rate this summer. Inflation at target is quite a milestone, considering where we came from: +11.1% high in October 2022.

Headline +2.0% inflation came in as expected and cooled from +2.3% recorded in April, which will be welcomed news at the BoE. Between April and May, headline inflation was unchanged, rising +0.3% though slightly softer than the expected +0.4%.

Year-on-year core inflation, which excludes food, energy, alcohol, and tobacco, slowed to +3.5% in May as expected, down from the +3.9% print recorded in April. Meanwhile, month-on-month core data slowed to +0.5% as forecast and below +0.9% in April.

Nevertheless, on the services side, inflation is still proving sticky; although price pressures eased to +5.7% in May from April’s +5.9% rate, the release was still 0.2 percentage points north of the market’s median estimate (+5.5%).

UK CPI Inflation Cooled to 2.0% in May, FP MarketsAccording to the ONS, ‘The largest downward contribution to the monthly change in both CPIH and CPI annual rates came from food [down -0.3% from +0.9% in April], with prices falling this year but rising a year ago; the largest upward contribution came from motor fuels [up +2.3% from -0.3% in April], with prices rising slightly this year but falling a year ago’.

The ONS also added that UK CPI inflation In the G7 is now lower than France (+2.6%), Germany (+2.8%), and the EU average (+2.7%).

UK CPI Inflation Cooled to 2.0% in May, FP Markets

UK Prime Minister (PM) Rishi Sunak recently declared victory on inflation via a video on X (formerly Twitter). The PM commented: ‘Great news this morning that inflation is back to normal at 2.0%’. The PM added: ‘When I became Prime Minister, inflation was at 11.0%, but we took bold action, we stuck to a clear plan, and that’s why the economy has now turned a corner’.

Rate Cut in August?

Following the release of the CPI numbers, there was a moderate hawkish shift in rate pricing, which was largely due to the services print. Overall, however, inflation shows it is heading in the right direction.

We will unlikely see a rate cut at tomorrow’s MPC meeting, particularly as we are only weeks away from the General Election. The OIS market indicates a 2.0% probability of a cut tomorrow; therefore, the Bank Rate will remain at its 16-year high of 5.25%. The first 25bp cut is still not expected until November’s meeting (though August’s [30% probability] and September’s [40% probability] meetings are still on the table).

Sterling (GBP) immediately spiked higher versus the US dollar (USD) and resumed moderately to the upside following the release, presumably on the back of the services inflation data and the modest hawkish repricing.

 

 

 

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