Inflation fell to 2% in May, bringing it back to the Bank of England’s target for the first time in three years. But economy watchers believe it will be August before the central bank begins to cut interest rates, amid concern that inflation may yet rise again.

Official figures published yesterday showed that UK annual consumer prices index (CPI) inflation rose by 2% in May, down from 2.3% in April.

The Office for National Statistics (ONS) found that falling food prices this year had made the largest downward contribution to inflation in May, as food and non-alcoholic beverage inflation eased back to 1.7% from 2.9%. However concern was expressed over the pace of services inflation, which eased from 5.9% in April but was still "hot" at 5.7% last month.

And while Prime Minister Rishi Sunak was quick to use the figures as evidence that the UK Government’s “bold action” and “clear plan” to reduce inflation was working, the successive rise in base rates by Bank of England between December 2021 and August last year are widely regarded to have been responsible for bringing inflation down. The figures also reflect "favourable base effects", as one economist noted.

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The Bank of England will announce tomorrow (Thursday) whether its Monetary Policy Committee voted to change the base rate from its current 5.25% at its June meeting.

Luke Bartholomew, deputy chief economist at Edinburgh investment giant abrdn, said: “The fall of headline inflation back to target was expected, but will still come as extremely welcome news to the Bank of England. The big question now is whether underlying inflation pressures in the economy are consistent with inflation staying around 2% in the medium term, or whether inflation will start to edge higher again once favourable base effects fade.

“On that front, there is still evidence of residual stickiness in services inflation, reflecting the strength of wage growth recently. That is why an interest rate cut tomorrow (Thursday) is still very unlikely. But we think the Bank’s communication tomorrow will set out a path for a cut in August, which is now looking increasingly likely.”

David Thomson, chief executive of Food and Drink Federation Scotland, said the continued fall of food and non-alcoholic drink price inflation provided “welcome respite for households and important for business recovery”.

“However, as politicians campaign across the country, we can’t stress enough the centrality of good food and drink to everyone’s lives and that the resilience of our sector isn’t a given,” he cautioned. “With agricultural commodity prices and energy costs rising once again, parts of the food and drink supply chain remain vulnerable and there’s little slack to cope with the impact of extreme weather events on harvests or further rises in shipping costs.

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"It’s crucial that the next UK Government and the Scottish Government work closely with our sector to ensure sufficient investment to guarantee the UK’s food security alongside economic growth. With the right incentives and the right regulation, our sector – the largest manufacturing sector in the country – should be a powerhouse for science and innovation, good jobs and community prosperity."

Susannah Streeter, head of money and markets at Hargreaves Lansdown, highlighted “hot” wage and service sector inflation as she suggested it will be August at the earliest before the Bank of England begins to cut interest rates.

Ms Streeter said: “The FTSE 100 has opened lower as investors digest the inflation reading which shows prices in the services sector remain hot, indicating a rate cut may not come until the Autumn. Fed policymakers are also staying cautious about the prospects for interest rate cuts. Concerns about an increase in geopolitical tensions in the Middle East and between Russian and Ukraine also seem to have added to a more downbeat sentiment.

“The last time UK inflation stood at 2% was in the run up to the Euros in July 2021, just before pent-up demand was unleashed while pandemic restrictions eased.

“As fans prepare to toast the tournament once more, seeing inflation finally return to target might be seen as a reason to put out more bunting, given how painful the cost of living crisis has been. But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates tomorrow. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count.

“There will be concerns that services inflation has only retreated slightly so although August remains a possibility for a rate cut, September is looking more likely – and the markets are only fully pricing in a rate cut in the Autumn.”