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This marks the lowest annual change in the consumer price index since July 2021, aligning with analysts’ forecasts. On a monthly basis, inflation increased by 0.3% in May 2024, consistent with April 2024 but slightly below economist expectations.

The UK’s CPI inflation rate was lower than France (2.6%), Germany (2.8%), and the EU average (2.7%), and matched the US (2.0%) in the 12 months to May 2024.

The decline in annual inflation rates in May 2024 was driven by reductions in food and non-alcoholic beverages, recreation and culture, and furniture and household goods. However, transport and communication provided the largest upward pressures.

Excluding energy, food, alcohol, and tobacco, core inflation rose by 3.5% in the 12 months to May 2024, down from 3.9% in April, meeting expectations. This represents the lowest core inflation rate since October 2021. On a monthly basis, core inflation increased by 0.5%, slowing from 0.8% in April.

Services inflation recorded a 5.7% year-over-year rise and a 0.6% month-over-month increase, slightly down from the previous 5.9% and 0.8% respectively, but overall a little higher than expected.

Simultaneously, the Office for National Statistics reported a 1.7% year-over-year increase in annual producer prices in May 2024, marking the highest rate in a year.

Are rate cuts on the horizon for the UK?

The May inflation report for the UK presented a mixed picture and has not triggered significant market reactions suggesting a higher likelihood of a Bank of England rate cut.

The British pound experienced a slight uptick following the release, rising to 1.2720 against the US dollar, while the euro softened slightly to 0.8440 against sterling.

Gilt yields remained broadly unchanged, with the 2-year gilt at a 4.16% yield and the 10-year gilt at a 4.04% yield, respectively.

The Bank of England is expected to keep the Bank Rate unchanged on Thursday, likely with a 7-2 vote split, and maintain consistent guidance.

Currently, markets are pricing in a negligible chance of any policy action in June, with expectations of a 10 basis point cut by August, 18 basis points cumulatively by September, 31 basis points by November, and 41 basis points by year-end.

Analysts’ perspectives on BoE rate cuts

Deutsche Bank is holding on to its prediction for an August rate cut but indicates that substantial changes would be necessary for the Monetary Policy Committee (MPC) to lower the Bank Rate during the summer.

They imply that the MPC could potentially delay action until September, allowing time to adjust economic forecasts in the August Monetary Policy Report (MPR) and consider two additional inflation and labour market reports before making any moves to ease restrictive policy.

Unicredit seems to take a slightly more dovish stance than the general consensus, anticipating a 6-3 vote split with one more member in favour of a cut compared to the May meeting, although the level of uncertainty remains considerable.

The minutes from the MPC are expected to repeat the guidance provided in May. The first rate cut is still projected for August, with a total of 75 basis points of reductions expected throughout the year, as economic growth remains sluggish and inflation hovers near 2%.

According to ING, changes in forward guidance are anticipated, and it is believed that the Bank may want to temper the “extended period” language ahead of the initial rate cut. Implementing such changes next week would likely indicate that an August rate cut is more probable than what the markets are currently pricing in.

The Dutch bank also plans to keep an eye on statements made after the UK general election on 4 July, as officials will once again be able to make public comments. If an August rate cut is likely, signals from Governor Andrew Bailey and others are anticipated. Any modifications in forward guidance might suggest that an August rate cut is more probable than the market currently predicts.