UK inflation finally back at target… but services not as reassuring

As May headline and core consumer price index (CPI) inflation measures were both in line with consensus at, respectively, 2.0% (year-on-year basis, vs 2.3% last month) and 3.5% (after 3.9%).

Headline inflation is finally back at the Bank of England’s (BoE) 2.0% target. So far so reassuring after last month’s upside surprises. However, again, there wasn’t as much movement as expected in services inflation which fell to 5.7% after 5.9% last month (consensus: 5.5%).

The main downside contributor to the decline in year-on-year inflation today was food prices, but there were also sizeable contributions from the recreation and culture category (apparently from a variety of components) and the furniture/household goods category. Only two of the main inflation categories were upside contributors (transport and housing/household services). Looking more closely at services inflation – the bit of inflation that the BoE continue to put particular weight on – there were falls in inflation across most of the main categories, it is just that the falls were relatively modest. On the whole though, this looks like a pretty broad-based fall in inflation.

This data is therefore somewhat reassuring as far as it goes, but unlikely to be enough for a rate cut from the BoE tomorrow after April’s upside surprise and with pay growth still relatively strong. I have an August cut pencilled into my forecast, but the data between then and now needs to provide more confidence that inflation is going to be at 2% on a sustained basis. In my view, services CPI around the 6% mark continues to look inconsistent with being confident that you are going to sustainably hit a 2% inflation target.

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