UK Inflation Falls to 2.0%, Meeting Bank of England's Target Ahead of Elections

The UK's inflation rate has fallen to the Bank of England's target of 2.0% in May, according to the Office for National Statistics (ONS), marking a significant milestone ahead of the country's general election on July 4. The headline reading declined from 2.3% in April, meeting the expectations of economists polled by Reuters.

The pound sterling reacted positively to the news, rising slightly to trade at $1.2721 by 7:33 a.m. London time. Services inflation, a key indicator closely watched by the Bank of England, stood at 5.7% in May, down from 5.9% in the previous month. Core inflation, excluding energy, food, alcohol, and tobacco, dipped to 3.5% from 3.9% in April.

Falling food prices were the primary contributor to the decline, while car fuel costs continued to exert upward pressure, the ONS reported. The slowdown in grocery sales, attributed to unseasonably bad weather, also played a role in the decline. According to Kantar, a UK market research firm, grocery sales rose 1.0% in the four weeks to June 9, marking the sixteenth consecutive monthly decline in food inflation.

Why It Matters : The latest inflation print brings the UK's economic performance into sharp focus ahead of the general election. With the opposition Labour party poised to secure a landslide victory, the ruling Conservative party will be keen to capitalize on the positive news. However, the Bank of England's decision on interest rates, scheduled for Thursday, remains a crucial factor in the economy's trajectory.

Azad Zangana, senior European economist and strategist at Schroders, cautioned that upward pressure on inflation could return in the second half of the year as the UK phases out its energy price cap. "From the third, fourth quarter onwards, you might start to see a bit more upward pressure coming through as the Bank of England has warned," he told CNBC's "Squawk Box." Zangana suggested that the Bank could even "surprise" the market with a rate cut this week, despite being widely expected to hold rates steady at 5.25%.

Markets are now pricing in a near-term cut, with all but two of 65 economists polled by Reuters last week expecting an interest rate trim in August. Financial markets are pricing in such a curb in September. The economic performance comes as the UK gears up for its general election, with polls pointing to a landslide victory for the opposition Labour party.

UK Prime Minister Rishi Sunak dubbed the latest print "great news" in a post on the X social media platform, adding that inflation was now "back to normal." Opposition politician Rachel Reeves acknowledged that, while inflation is growing at a slower rate, "the cost of living crisis is still acute" for many families.

Key Takeaways:

• UK inflation falls to 2.0% in May, meeting the Bank of England's target.
• Services inflation stands at 5.7% in May, down from 5.9% in the previous month.
• Core inflation dips to 3.5% from 3.9% in April, driven by falling food prices.
• Markets are pricing in a near-term interest rate cut, despite the Bank of England being expected to hold rates steady.
• The UK's general election on July 4 will be influenced by the country's economic performance, with the opposition Labour party poised to secure a landslide victory.

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