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Inflation finally hits 2% target after three years

Inflation finally hits 2% target after three years
Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
19/06/2024
Updated:
19/06/2024

The Consumer Prices Index (CPI) measure of inflation finally eased back to the 2% sweet spot in May – the first time it’s been at this level since 2021.

The 2% inflation figure is the lowest it’s been since July 2021, providing some relief to households who have battled historically high prices that peaked at 11.1% in October 2022.

Month-on-month, it’s cooled from the 2.3% recorded in the 12 months to April. But while it’s eased back, prices are still rising, just at a slower pace.

According to the Office for National Statistics (ONS), the biggest downward contribution came from falling food prices, while the largest upward pull came from fuel prices.

It noted: “The easing in the annual inflation rates in May 2024 reflected downward contributions from eight divisions, partially offset by upward contributions from two. The largest downward effects came from food and non-alcoholic beverages, recreation and culture, and furniture and household goods. Transport provided the largest, partially offsetting, upward contribution.”

The ONS listed bread and cereals, vegetables, sugar, jam, syrups, chocolate and confectionery as having notable price cuts.

Meanwhile, core inflation, which excludes the more volatile energy, food, alcohol and tobacco prices, rose by 3.5% in the 12 months to May, down from the 3.9% in April.

‘Households still being squeezed’

While this is a landmark day, many experts and commentators said it’s not a time to celebrate just yet.

Shaun Port, managing director for savings at Chase UK, said: “Services inflation remains high, so core CPI is falling more slowly than the headline rate of inflation, and inflation may actually rise again later this year – so the path ahead is not straightforward and consumers will still feel their household finances being squeezed, regardless of any positive headlines in the short term.”

This is echoed by Lily Megson, policy director at My Pension Expert, who said: “The Government must recognise that today’s figures do not signal the end of people’s fight for financial security. Pension poverty, for example, is on the rise. The cost-of-living crisis has made it incredibly challenging for individuals to contribute to their pension pots, leading many towards a difficult, delayed or unattainable retirement.

“The next Government will have its work cut out. With inflation back at manageable levels, now is the time to help people get back on the path to recovery. Prioritising financial education and ensuring accessible advice for all will be essential. This approach will not only empower people to take control of their financial futures, but also ensures that everyone benefits from any economic recovery over the coming months.”

Turning to mortgages, Ben Thompson, deputy CEO at Mortgage Advice Bureau, said: “May’s inflation drop, in other circumstances, may have prompted some positive movements in the mortgage market. But, with rate cuts largely priced in, the Fed dragging its heels and a general election in a matter of days, the Bank of England will be reluctant to make any waves.

“This doesn’t mean it’s a time to sit still for those aiming to get on the property ladder or with mortgage deals due to expire. Mortgage rates are unlikely to drop really significantly when the Bank of England does cut rates, so now is the time to get on the front foot, speak to a broker and get mortgage ready. There are competitive deals on the market to be taken advantage of.”

Base rate speculation

Dean Butler, managing director for retail direct at Standard Life, said: “The US and the Eurozone are still sat above target, making the UK a positive outlier and adding to speculation that the Bank of England could move to cut interest rates later in the year. All in all, now seems a good time to take stock and consider how the changing economic environment could influence your finances and approach to saving.”

Meanwhile, Andy Mielczarek, founder and CEO of SmartSave, said: “Now more than ever, people must be proactive. With inflation at a three-year low, there is a golden opportunity for savers to lock down the best long-term savings opportunities while they last. No matter the outcome of tomorrow’s Bank of England meeting, there are clear indications that it won’t be long until interest rates follow inflation in its downward trend.”

James McManus, chief investment officer at digital wealth manager Nutmeg, said: “Anyone hoping today’s data will encourage the Bank of England to go ahead with the first cut to interest rates tomorrow could well be disappointed. Core inflation is still running higher at 3.5%, services inflation at 5.7% and wage growth is around 6% year-on-year. Central bankers have given signals that they want to cut rates, and they are aware of the pressures higher borrowing costs are putting on households, but expectation is the first rate cut won’t be until later in the year.”