LONDON – Inflation in the U.K. returned to the Bank of England's target rate of 2% for the first time in nearly three years, official figures showed Wednesday, a development that was seized on by the governing Conservative Party as evidence that its economic plan is “working” ahead of the July 4 election.
The Office for National Statistics said inflation, as measured by the consumer prices index, fell to 2% in the year to May from 2.3% the month before, with food prices providing the biggest downward contribution.
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The decline does not mean that prices are falling — they are just rising at a slower rate than they have for the past few years during a cost of living crisis that has seen living standards drop for millions across Britain. But Conservative Prime Minister Rishi Sunak hailed the “great news” that the “economy has now turned a corner.”
However, Rachel Reeves, who will become Treasury chief if the main opposition Labour Party wins the election, said working people are “worse off" with mortgage rates higher than they have been for years and taxes at a 70-year high.
Sunak betted that the more stable economic environment would help his Conservatives when he surprised many and called an earlier election than expected after last month's drop in inflation. However, opinion polls have barely budged over the past four weeks and Labour retains a clear lead in polls. The opposition party is widely expected to return to power for the first time since 2010.
The fall in inflation follows nearly three years of above-target inflation. The last time inflation was at 2% was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then because of Russia’s invasion of Ukraine, which pushed up energy costs.
Despite the decline, few economists think the Bank of England will reduce its main interest rate from 5.25% on Thursday. Some policymakers are still concerned over the scale of price rises in the crucial services sector and the pace of wage increases, which raise the risks of an inflation rebound if interest rates are cut too soon. The consensus in financial markets is that rates will be cut in August or September.
“Despite this landmark fall in inflation, concerns over both underlying price pressures and changing policy in the run-up to a general election means a June interest rate cut is almost certainly off the table," said Suren Thiru, economics director at The Institute of Chartered Accountants in England and Wales
The Bank of England, like the U.S. Fed and other central banks, raised interest rates aggressively in late 2021 from near zero to counter the rapid increase in inflation, which hit a peak of above 11% in late 2022.
Higher interest rates — which cool the economy by making it more expensive to borrow — have helped ease inflation, but they’ve also weighed on the British economy, which has barely grown since the pandemic rebound.
Labour leader Keir Starmer has stressed that upping the U.K.'s economic growth will be the driving mission of his government if he becomes prime minister on July 5.
In a blow to Sunak, billionaire John Caudwell, who has been a prominent donor to the Conservative Party, said he was now supporting Labour for the first time having become convinced that Starmer was serious about wealth creation.