The UK CPI has met the Bank of England’s target, hitting 2 per cent for May for the first time in nearly three years.
Aegon Asset Management fixed income investment manager James Lynch says: “At the start of 2023 with inflation running over 10 per cent it seemed like a gargantuan task to return inflation back to 2 per cent target. Back then if the BoE was told it would get to the magical 2 per cent number one day before its MPC meeting with interest rates at 5.25 per cent, it would have been very certain it would cutting rates on the 20th June 2024.
“However, that now seems very unlikely. Indeed, even a move at the following meeting in August hangs in the balance. This is because the underlying mix of the inflation basket does not give it much comfort that this return to 2 per cent target is sustainable. Goods inflation is in deflation at -1.3 per cent per cent while services is 5.7 per cent. The BoE has stated it believes services is a better gauge of underlying inflation and 5.7 per cent is 0.4 per cent above its forecast for this print.
“While it is welcome news that inflation has been tamed, we might have to wait a little longer for the BoE to be comfortable to reduce interest rates accordingly.”
AJ Bell director of personal finance Laura Suter says: “Inflation has finally hit the Bank’s target of 2 per cent, for the first time in almost three years. CPI inflation dropped once again in May, as food prices helped to push the headline rate down. The drop today down to 2 per cent ends 34 long months of above-target inflation and brings price increases back to a much more palatable level.
“The figure will be heralded by Rishi Sunak on the campaign trail as vindication of the policy setting moves that the Conservatives have made over the past few years. In reality, much of the leg work was done by the Bank of England, with the government being very limited in how much they control inflation – but that’s unlikely to stop them from doing a bit of glory-stealing.
“Food prices actually fell in May, with the price of essentials like bread, cereals, vegetables and even chocolate dropping. This month’s fall compares to a chunky rise in food costs a year ago, which helped to pull the inflation rate back down. However, we’re still paying more for food and drink than we were a year ago – and the overall food basket is still much more expensive than at the start of the cost of living crisis.
“Elsewhere, we saw the price of a variety of items dropping, from a new fridge-freezer and vacuum to the cost of a new pet or the latest bestselling book. Across the spectrum people are starting to see prices drop in certain areas. There’s no escaping the fact that many prices are still rising – but the easing in some sectors is a welcome move in the right direction.
“But the cumulative effect of all the price rises, plus the big impact of increases in rent or mortgage costs, and the higher personal tax burden over the past few years means it’s unlikely many people are feeling the benefit of inflation hitting target just yet. A pertinent factor that many will be taking to the ballot box next month.
“Inflation hitting target means many will be expecting a cut to interest rates at the Bank’s meeting tomorrow. However, it would be very unlikely for the ratesetters to cut interest rates during an election campaign. The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up. It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.”
Standard Life managing director for retail direct Dean Butler says: “This is a big moment for the UK economy as inflation meets the Bank of England 2 per cent target for the first time since 2021. 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.
“Regardless of the economic environment, it’s recommended you have six months of easy-access cash based ‘rainy day’ savings, in case of illness, redundancy and those one-off extra costs that come up in life. If you’re looking to open a new account, interest rates aren’t as good as they were a few months ago but you can still get a decent deal if you shop around. It’s worth considering an easy-access ISA as interest payments are tax free.
“A lower inflation, potentially lower interest rate environment brings mixed news for cash-based savers. On the plus side price rises won’t be eating into the value of your savings to the same extent, but likewise you won’t be getting the same returns either. Ultimately, gains are likely to be marginal – at 3 per cent interest and 2 per cent inflation, for example, savings of £10,000 will be worth £10,189 in real terms after two years. If you’ve got the six months savings cover, then you could consider investing, perhaps into a stocks and shares ISA. This offers a greater chance of substantial returns, but there’s always the chance of losing money too.
“If you’re able to take a long-term view, consider saving into a Lifetime ISA (LISA), which can be particularly beneficial if you’re saving up for a first property, or a pension, which offers both the benefits of investing, tax efficiency and a potential build-up of compound investment growth over a number of years.”