In May, the United Kingdom’s inflation rate fell back against the Bank of England’s 2% target for the first time in almost three years.
The mentioned result is highly likely not to be a factor of significant impact on the political state of UK Prime Minister Rishi Sunak before the elections scheduled for next month. It is worth noting that the economic situation is not what can be described as an enclosed space. In a certain sense, the level of material well-being of the population is a formative and fundamental circumstance for the state of affairs in the social environment. Also, the situation in the space of the economic dimension of the existence of the state has a significant impact on the political situation in the country.
In May, consumer price growth in the United Kingdom demonstrated the dynamic of a slowdown. The pace of the corresponding process was fixed at 2.3% in April. The May inflation information was published on Wednesday, June 19, by the Office for National Statistics. It is possible that the dynamic in consumer prices recorded in the United Kingdom last month may become a circumstance that forms a kind of platform of argument in favor of the Bank of England deciding in the coming months to ease monetary policy in the form of implementing cutting interest rates. At the same time, it is worth mentioning that the UK financial regulator is not set up to lower the cost of borrowing very shortly. Officials of the central bank of the United Kingdom have made very clear statements that the minimum probability is that a decision on monetary policy easing will be made before the elections.
Rishi Sunak has already commented on the positive inflation data. He stated that this information is evidence of victory over the sharp increase in the cost of living. In 2022, the United Kingdom faced such a negative form of economic reality as double-digit inflation. To a certain extent, geopolitical tensions contributed to this state of affairs. The mentioned factor as a source of impact on the economic situation in the United Kingdom has weakened. At the same time, the current state of affairs in the space of international relations still continues to be classified as an unfavorable predicament and so far has not shown signs of rapid normalization or at least minimal improvement.
The media claims that inflation figures are likely not to be a sufficient argument for voters for the ruling Conservative party to win a landslide victory over Labour in the elections to be held on July 4. It is worth noting that the preliminary results of sociological surveys of public opinion on political issues in the United Kingdom do not indicate in favor of the Conservatives.
The policymakers of the Bank of England are likely to opt for a kind of waiting tactic to observe the dynamic of consumer prices. It is also worth noting that in May, in the UK, inflation in the service sector was recorded at 5.7%. In April, the corresponding figure was 5.9%. Economists interviewed by the media predicted that inflation in the UK services sector in May would be 5.5%. They also expect the headline inflation rate to rise to 2.4% by the end of the current year.
The Office for National Statistics reported that prices in restaurants and hotels had the greatest impact on the mentioned result in the service sector. Currently, a request for higher pay is being recorded in the specified sector. Separately, the Office for National Statistics noted that rental and fuel costs also had an impact on rising prices for services.
Zara Nokes, global market analyst at JPMorgan Asset Management, says that inflation at 2% will not be a long-term economic reality. Also, according to the expert, the new data on price growth is news indicating a radically minimal probability that this week the financial regulator of the United Kingdom will decide to ease monetary policy. Zara Nokes says that inflation in the UK services sector is still too high.
Economists Dan Hanson and Ana Andrade say that another stronger-than-expected inflation indicator in the services area is generating uncomfortable reading for the Bank of England, and is likely to force the financial regulator to be cautious about how quickly it will be able to ease monetary policy in the current year. According to these experts, headline inflation at 2% justifies lowering the cost of borrowing in the summer, probably in August. They also separately noted that the continuing signs of the persistence of the price growth process are an argument in favor of the United Kingdom’s financial regulator easing monetary policy as part of a strategy of slow action.
After the data on inflation in the UK services sector were released, the pound erased modest losses. The national currency of the United Kingdom rose by 0.2%, reaching $1.2730. Currently, traders adhere to a kind of consensus opinion that the probability of cutting interest rates by the Bank of England by a quarter point in August is 30%. It is worth noting that before the publication of data on inflation in the UK services sector, the mentioned indicator was 45%.
Last year, the United Kingdom faced the most difficult inflation situation among its major peers. Currently, London is actually the leader in containing price pressure. Only in the United States, inflation is also 2% by comparable measures, although its headline rate is higher.
The Resolution Foundation notes that the United Kingdom has won the international race to return to the inflation target. It is also underlined that the UK became the first among the countries of the eurozone and the United States, which managed to bring headline inflation to 2%.
Currently, in the United Kingdom, there is what can be described as a kind of public doubt about the ability of conservatives to ensure a favorable state of affairs in the country’s economic system. The corresponding sentiments and opinions were formed against the background of the negative experience of last year when London faced realities such as recession and rising prices, which demonstrated the dynamic of rapid growth. The Labour Party will likely use the mentioned factors as a kind of argument in its favor in the context of the pre-election debate process and as part of positioning its political program as the most useful and effective for the country. The fact that Rishi Sunak has already commented positively on the inflation data indicates that the corresponding indicator is very important from a political point of view. The UK Prime Minister separately noted that the latest statistical information on price growth records that this figure is lower than in the US, France, and Germany.
Labour’s Shadow Chancellor Rachel Reeves says that there is currently everything is not fine in the economic reality space of the United Kingdom. In this context, it was noted that for many families and pensioners, the cost of living crisis still continues to be a very sensitive issue. Rachel Reeves also stated that inflation is declining, but this does not mean that the dynamic of prices is on a similar trajectory. In this context, it was underlined that prices continue to show growth, but the pace of the corresponding process has slowed down.
Policymakers at the Bank of England led by Governor Andrew Bailey continue to monitor signs of continued inflation. They also pay attention to the dynamic of salaries and price formation in the service sector. All specified indicators are the factors based on which the financial regulator of the United Kingdom will decide on monetary policy easing.
In May, UK goods prices fell by 1.3%, which is the most since 2016. Annual food inflation decreased to 1.6% over the same period. Prices for some food products, including fish and dairy, continue to be on a downward trajectory.
Sanjay Raja, chief UK economist at Deutsche Bank Research, noted that prices for services may be slightly stickier than the preliminary expectations for the dynamic of the corresponding indicator. According to the expert, the mentioned indicator will raise the bar for lowering the cost of borrowing in the United Kingdom in August.
The opinion is currently spreading among economists and investors that the Bank of England on Thursday, June 20, when a new monetary policy decision is published, will leave the benchmark rate at 5.25%, which corresponds to a 16-year high. Officials of the central bank of the United Kingdom, against the background of the election campaign, are following tactics involving the rejection of public statements. At the same time, before the start of the election process, they repeatedly expressed concerns about the benchmark rate.
Martin Sartorius, principal economist at the CBI, says that the May data will be welcome news for households, as they are currently moving towards a more favorable inflationary environment. The expert noted that in the United Kingdom, many will continue to face financial difficulties because now the price level is much higher than in previous years. Martin Sartorius also underlined that the high-cost index has a particularly strong impact on such categories of expenses as food and energy.
It is worth noting that pipeline inflation pressures remained subdued in the economic system of the United Kingdom remains low. Producers’ input prices for raw materials fell by 0.1% year-on-year in May. At the same time, output prices increased by 1.7%. Both of the mentioned indicators have dropped sharply from their peak levels in 2022.
Paula Bejarano Carbo, economist at the National Institute of Economic and Social Research, expects some rebound in inflation already in the current month.
Nomura analysts suggest that monetary policy easing in the United Kingdom in August is still possible. In their opinion, the UK financial regulator may decide to cut interest rates if a situation forms in which pay shows growth and prices for services decrease even further.
Inflation in the United Kingdom peaked in October 2022. At that time, the corresponding figure reached 11.1%. In October 2022, the United Kingdom’s inflation rate was at a 41-year high.
Melanie Baker, senior economist at Royal London Asset Management, is also of the opinion that cutting UK interest rates in August is still a realistic scenario. According to the expert, the financial regulator of the United Kingdom will make an appropriate decision if the process of reducing inflation demonstrates stability. Melanie Baker also noted that the consumer price index in the services sector at around 6% still seems inconsistent with confidence in the prospects of achieving the 2% inflation target.
Returning to the topic of the economic situation as a factor impacting the state of affairs in the political space of the United Kingdom, it is worth noting that the current rhetoric of the conservatives is based on the statement that their difficult decisions have a result. At the same time, Labour says that the pressure on UK finances continues to be significant.
Chancellor Jeremy Hunt focuses on the fact that the inflation rate in the United Kingdom is currently lower than in almost all major economies. He also noted that the corresponding state of affairs would not have become a reality under Labor that refused to condemn the public sector pay strikes.
Liberal Democrat Treasury spokeswoman Sarah Olney says that millions of people in the United Kingdom will not feel better. According to her, Rishi Sunak’s positive statements about the economic situation in the country will not be convincing for families who are faced with a rapid increase in mortgage loans and a growth in shopping prices compared to the state of affairs observed just a few years ago.
Yael Selfin, chief economist at KPMG UK, says that inflation in the United Kingdom services sector is still uncomfortably high. According to the expert, the Bank of England will have to see a further decline in the mentioned indicator before deciding to cut interest rates.
David Bharier, head of research at lobby group the British Chambers of Commerce, says that the May inflation data is an additional argument in favor of lowering borrowing costs in the coming months.
As we have reported earlier, UK Unemployment Hits 2.5-Year High.
