The United Kingdom is the first major economy to reach 2% inflation. Will this change the upcoming elections?
The United Kingdom is the first major Western economy to hit the 2% inflation target, with May’s reading coming in cooler than expected. On a quarterly basis, the UK inflation dipped 0.3%, in line with forecast by Reuters-polled economists.
At its peak in October 2022, UK inflation reached 11.1% annual growth, more than any of its economic peers. With today’s report, the UK beat the European Union and the United States to the 2% target. Inflation in the Eurozone remained stable in May at 2.6%, while it lowered slightly in the US at 3.3%.
The Bank of England fought harshly against inflation, bringing interest rates to a 20-year high of 5.25%. At its next meeting on Thursday, the BoE is widely expected to keep rates unchanged. Markets are pricing in the first rate cut in August.
Despite having higher inflation, the European Central Bank slashed interest rates by 0.25% at the June meeting. Interest rates on the euro had reached their highest level in history at 4%.
Core inflation, excluding volatile food and energy prices, fell to 3.5% annually from 3.9% in April. Services inflation, the BoE’s preferred measure to evaluate consumer attitude, decreased to 5.7% from 5.9%.
“Services CPI around the 6% mark continues to look inconsistent with being confident that you are going to sustainably hit a 2% inflation target, in my view,” Melanie Baker, senior economist at Royal London Asset Management, said in a note.
Political strife
The inflation reading comes two weeks before the UK’s general elections scheduled on July 4th.
Polls show a landslide victory for the opposition Labour Party, which has not been in power in the country since 2010. Current Prime Minister Rishi Sunak is seeking reelection for his Tory, or Conservative, party.
Sunak and the current Conservative government are trying to use the inflation drop as a political talking point. Finance Minister Jeremy Hunt said a “soft landing” - a condition with slow economic growth and declining inflation - “would not have happened under Labour that refused to condemn the public sector pay strikes, that would have meant inflationary pay rises, inflation lasting longer”.
Despite the objective decline in prices, UK electors are still struggling with a stagnating economy that only slightly avoided recession in 2024. “Unlike Conservative ministers, I’m not going to claim that everything is all fine, that the cost of living crisis is over,” shadow Finance Minister Rachel Reeves said, “because I know that pressures on family finances are still acute”.
It may now be too late for Sunak to capitalize on the inflation drop, especially if the Bank of England will keep rates unchanged.
