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Inflation Hits Bank of England's Target for First Time in Nearly Three Years

In a surprising turn of events, inflation has met the Bank of England's target of 2% for the first time in almost three years, according to official figures. This marks a significant decrease from the 2.3% reported in April.



With the general election looming on 4 July, the state of the economy has become a pivotal issue. Each major party is fervently proposing strategies to manage the cost of living, a concern that continues to dominate public discourse.


The Conservative Party has attributed the positive inflation figures to their "difficult decisions" in economic policy, suggesting their approach is yielding results. However, Labour maintains that financial pressures on households remain severe. "I know that the cost of living crisis is still acute," commented Rachel Reeves, Labour’s shadow chancellor. "Even though inflation is falling, it doesn't mean prices are coming down; they're just rising at a less fast rate."


The drop in May's inflation was primarily driven by a decrease in prices for food and soft drinks, as well as a slowdown in price increases for recreation, culture, furniture, and household goods. Notably, the prices of bread, cereals, vegetables, sugar, jam, and chocolate fell between April and May. Nonetheless, overall food prices are still a staggering 25% higher than they were at the start of 2022.


Fuel prices have also seen mixed changes. While petrol prices rose by 0.7p per litre from April to May, diesel prices dropped by 0.8p per litre.


The latest inflation figures come just before the Bank of England's decision on UK interest rates, expected to remain at 5.25%—a 16-year high—for the seventh consecutive meeting. Market expectations have shifted, with reduced bets on a rate cut in August, driven by persistent price increases in the services sector, which were up 5.7% in the 12 months to May.


Since peaking at 11.1% in October 2022, following Russia's invasion of Ukraine, inflation has been on a steady decline. However, many households continue to struggle with the cost of living. Higher interest rates, intended to curb consumer demand, have also driven up mortgage rates and rents. Official figures reveal that average rents paid to private landlords in the UK rose by 8.7% in the year to June.


Despite the falling inflation rate, mortgage rates remain high as lenders anticipate future moves by the Bank of England. This financial strain is felt by businesses as well. Gary Wildman, owner of John Wildman & Sons butchers, shared his experience: "Prices are probably 10 to 15% more than they were at the beginning of Covid, but they are level now, definitely," he told the BBC. Nevertheless, some products like pork continue to see price increases, and energy bills for his shop are higher than in previous years. "You can't pass all costs on to customers or the customers wouldn't come in," he added.


The inflation figures have ignited a fierce debate among political parties. Chancellor Jeremy Hunt asserted that the UK's inflation rate is now lower than that of most major economies. "That would not have happened under Labour," he claimed, accusing the opposition of supporting inflationary pay rises during public sector strikes.


Labour, however, continued to press concerns about the cost of living. "Unlike Conservative ministers, I'm not going to tell people that everything's fine," said Reeves. The Liberal Democrats echoed this sentiment, with Treasury spokeswoman Sarah Olney stating, "Rishi Sunak's boasts will ring hollow to countless families seeing their mortgages skyrocket and agonising rises in shopping prices compared to just a few years ago."


Analysts caution against attributing the inflationary trends solely to political decisions. The primary drivers of the soaring cost of living have been the Covid pandemic and the war in Ukraine, which spiked global commodity prices. Conversely, the recent decline in inflation is largely due to falling wholesale energy and food prices, coupled with 14 rate hikes by the Bank of England.


As of now, UK inflation is rising at its slowest pace since July 2021, lower than the eurozone's 2.6% and the US's 3.3% in May.


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