UK inflation to fall below target for first time in three years, economists say

The fight against inflation in the UK could see it fall below the Bank of England’s target level for the first time in more than three years, economists have predicted.

New data released from the Office for National Statistics on Wednesday will reveal how fast prices were rising across the UK last month.

It comes after inflation returned to the Bank’s 2% target in May, after nearly three years of it being above target largely as a result of soaring food and energy prices.

But analysts think the rate of Consumer Prices Index (CPI) inflation might have undershot the target in June, with it coming in at 1.9% for the month, according to a consensus compiled by Pantheon Macroeconomics.

The last time it was below target was in April 2021, when CPI was recorded at 1.5%.

“After nearly three years of running above target, in May, UK CPI inflation returned to the Bank of England’s target of 2%. This is indisputably good news,” said Sandra Horsfield, an economist for Investec.

“Yet jubilation about this must be tempered: the ‘cost-of-living crisis’ is far from over for some.”

“The new Labour government will need to factor ongoing cost-of-living pressures in for some time yet, even if CPI inflation stays broadly on target,” she said.

Meanwhile, experts said it will be the finer details of the inflation data that could come under greater scrutiny.

In particular, economists will be looking at services inflation, which tracks categories such as hospitality, culture and housing, and has put more pressure on the overall rate in recent months.

Sanjay Raja, a senior economist for Deutsche Bank, said he expects live music inflation to nearly double to around 10% in June from 5.7% in May.

This was partly driven by Taylor Swift’s arena tour in UK cities last month, he said.

Any signs of persistent inflation will present a fresh dilemma for the Bank of England’s interest rate-setters.

Andrew Bailey, the Bank’s Governor, stressed last month that it needs “to be sure that inflation will stay low”, which is why it decided to hold interest rates at 5.25% “for now”.

James Smith, developed market economist for ING, said: “Policymakers are still almost exclusively focused on services inflation, and it’s the one remaining release of this data that will determine whether the Bank can cut rates in August.”

But he said that “barring any big surprises” in the inflation data, he is expecting the Bank to want to start cutting rates this summer.