UK Inflation Eases to BoE Target, But Challenges Remain

Figures released this morning indicate that UK inflation fell to 2% over May marking the first time that it has been in line with the Bank of England’s target since July 2021.

Figures from the ONS showed the country’s consumer price index falling from 2.3% in April to 2% in May, against a market consensus which was also forecasting inflation to fall to the BoE’s target.

On a monthly basis prices rose 0.3% between April and May, against forecasts of 0.4%.

When excluding the volatile components of food and energy, core inflation met market expectations, coming in at 3.5%. Given that this is 1.5 percentage points above CPI, the print indicates how services inflation will continue to cause a headache for policy makers given how ‘sticky’ it is proving.

Moreover, notwithstanding how the consumer prices index including owner occupiers’ housing costs fell 20bps from last month’s figure (on an annualised basis), it nonetheless remains more elevated at 2.8%. When looking at core CPIH, remains at 4.2%, indicative of how inflationary pressures remain in the country.

Service inflation also remained considerably higher at 5.7% in May, having similarly fallen 20bps from April’s figure.

With service price inflation remaining elevated, money markets have marginally downwardly revised their expectations of a rate cut in August. For example, while markets were pricing in around a 44% chance of an August cut during yesterday’s session, the market is now implying around a 36% chance.

Attention now turns to the BoE’s monetary policy committee meeting on Thursday. While economists are forecasting a hold, markets will be looking for forward guidance from Threadneedle Street as speculation grows on when the first cut may come.

Research from the EU’s climate service has shown that May 2024 was the warmest May on record. Here, the Copernicus Climate Change Service identified that May was 0.65°C above the 1991-2020 average, 0.19°C above the previous April record in 2020 and was 1.63°C above the pre-industrial (1850-1900) average.

This was also the twelfth consecutive month in a row which saw global temperatures breach new average records.

This comes against the target laid out during the Paris COP21 conference in 2015 which saw leaders around the world pledge to keep global warming within a 1.5C threshold of preindustrial levels.

Earlier this month, the UN’s World Meteorological Organization predicted that there was an 80% chance that such a threshold would be breached within the next five years.

In a speech marking World Environment Day, the UN’s Secretary-General António Guterres put forward his idea of a windfall tax on fossil fuel companies. According to Guterres, Co2 emissions would have to decline 9% each year in order for the world to keep within the Paris threshold.

The survey also identified that the global average sea surface temperature came in at a record high for the month of May at 20.93°C.

When looking at sea ice extent, the Arctic Sea ice was roughly in line with the May average (having been 2% below last month), however in the Antarctic, sea ice extent was alarmingly 8% below average.

Commenting on the data, one of the deputy Directors of the Copernicus Climate Change Service said that “The climate continues to alarm us – the last 12 months have broken records like never before – caused primarily by our greenhouse gas emissions and an added boost from the El Niño event in the tropical Pacific. Until we reach net-zero global emissions the climate will continue to warm, will continue to break records, and will continue to produce more ever more extreme weather events”.

US Retail Sales for came in lower-than-expected yesterday afternoon, edging up just 0.1% on a monthly basis against forecasts of 0.2%. While the American labour market shows signs of remaining robust despite tighter monetary conditions, and growth in the US outpaces the majority of advanced economies, yesterday’s figures point to how US consumer spending appears to be easing amid a higher cost of living, growing delinquencies and political uncertainty.