People shop in the busy Kingston district of London, England
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Britain’s inflation rate fell to the Bank of England’s target of 2.0 percent in May, the Office for National Statistics said on Wednesday, in the final release of major economic data ahead of July’s general election.
The overall index fell from 2.3 percent in April and was in line with the 2 percent forecast by economists polled by Reuters.
The pound rose slightly immediately after the announcement and was trading at $1.2721 as of 7:33 a.m. London time.
Services inflation, which is closely watched by the Bank of England due to its dominance in the UK economy and reflects home-grown price increases, rose to 5.7% in May from 5.9% the previous month.
Core inflation, which excludes energy, food, alcohol and tobacco, fell to 3.5% from 3.9% in April.
The ONS said falling food prices were the biggest factor behind the decline, while motor fuel costs continued to come under upward pressure.
Unseasonably bad weather caused food sales growth to slow to its slowest in two years, according to new data released Tuesday by British market research firm Kantar. The index showed food sales rose 1.0% in the four weeks to June 9, marking the 16th consecutive month of declines in food inflation.
While the latest data brings inflation in line with the Bank of England’s target, Azad Zangana, senior European economist and strategist at Schroders, warned that upward pressure could build again later this year as Britain phases out its energy price cap.
“As the Bank of England has warned, we may start to see a bit more upward pressure from the third quarter, the fourth quarter onwards,” he told CNBC’s “Squawk Box.”
Zangana suggested the bank could “surprise” markets with a rate cut this week when it next meets on Thursday.The bank is widely expected to keep interest rates unchanged at 5.25% for the first time since August 2023, when inflation was hovering around 7.9%.
But with inflation approaching its target, markets are pricing in a near-term rate cut. All but two of the 65 policy rates are at 10%. Economists surveyed by Reuters The Fed said last week it expects a rate cut in August, but financial markets are pricing in a cut in September.
The economic figures come as Britain prepares for a general election on July 4, with opinion polls predicting a landslide victory for the opposition Labour Party.