The shadow chancellor, Rachel Reeves, has said pressure on household finances remains “acute” despite official figures showing inflation fell to 2% in May, returning to the official target rate for the first time in nearly three years.
The Office for National Statistics (ONS) said the consumer prices index (CPI) had eased in May, down from 2.3% in April, raising expectations of a cut in borrowing costs by the Bank of England.
Lower prices growth will give encouragement to Rishi Sunak after the prime minister made bringing inflation under control one of his main aims. The release of the inflation figures represents one of the last significant economic indicators before the vote on 4 July.
Sunak said the fall in inflation was “great news” and meant consumer prices were rising at a slower rate than in Germany, France and the US. “When I became prime minister inflation was at 11%. But we took bold action. We stuck to a clear plan and that’s why the economy has now turned a corner,” he said.
However, Reeves said inflation under the Conservatives had left “working people worse off”.
She told the BBC: “Of course it’s welcome that inflation has returned to target for the first time in nearly three years. But, unlike Conservative ministers, I’m not going to claim that everything is all fine, that the cost of living crisis is over, because I know that pressures on family finances are still acute, because, while inflation is down, of course, those higher prices still remain.
“Prices have risen in the shops, mortgage bills are higher and taxes are at a 70-year high.”
The TUC general secretary, Paul Nowak, said the fall in inflation masked three years when “UK families have suffered the highest prices rises in the G7 – with inflation going up more over that period than it usually does over an entire decade”.
The decline was in line with predictions from City economists and marked the first time inflation hit the Bank’s 2% target since July 2021.
The central bank is still expected to keep interest rates at 5.25% when it publishes its decision on Thursday.
Until recently, financial markets were betting the Bank would make its first cut in the cost of borrowing at a meeting in November. Investors now expect the first cut in September and a further cut in December.
The Bank’s monetary policy committee (MPC) aims to keep inflation at about 2% but has forecast a rise later in the year back towards 3%, before a fall again next year to 2%.
Figures from the ONS showed the rising cost of food and beverages eased along with furniture and the price of household goods.
Analysts said the high level of core inflation, which excludes volatile items such as food and fuel, would be concerning to the central bank.
Core inflation was 3.5% in the 12 months to May, down from 3.9% in April. The rising price of services, which eased from 5.9% to 5.7%, was one of the main factors keeping core inflation elevated.
Service industries have complained that they experienced increased IT and labour costs, which they were forced to pass on to consumers. Average wages excluding bonuses rose by 6% in the three months to the end of April.
Sanjay Raja, the chief UK economist at Deutsche Bank Research, said services inflation was “the key gauge watched by policymakers” and there was a widening gap with the central bank’s forecasts.
“The wedge between the Bank’s projection and actual data widened a little more, adding to concerns that services prices may be a little stickier than anticipated. It will raise the bar for an August rate cut.”
However, the Confederation of British Industry said a cut in the cost of borrowing was likely in August, despite stubbornly high services inflation.
The business lobby group’s principal economist, Martin Sartorius, said: “Today’s data sets the stage for the MPC to cut interest rates in August, in line with our latest forecast’s expectations.”
Housing costs, which include mortgage interest payments, property transaction charges and maintenance bills, increased by 6.7% over the past year, up from 6.6% in the 12 months to April. The ONS said it was highest annual rate since records began in 1992.
Housing is not included in the CPI. An alternative index that includes owner-occupier’s housing costs, the consumer prices index including housing (CPIH), also fell, but from 3% in April to 2.8% in May.
In May last year, inflation was 8.7%, down from more than 11% in October 2022, the highest rate in more than 40 years.
