British inflation returned to its two per cent target in May for the first time in nearly three years, official figures show, as the economic effect of the COVID-19 pandemic and Russia’s full-scale invasion of Ukraine faded.

The fall in inflation will be welcomed by both Prime Minister Rishi Sunak and the Bank of England, but likely has come too late either to turn around Sunak’s fortunes at the July election or to prompt a BoE rate cut on Thursday.

May’s data released on Wednesday showed services price inflation – which the BoE thinks gives a better picture of medium-term inflation risks – was 5.7 per cent. 

That was down from 5.9 per cent in April but not as big a drop as the 5.5 per cent that economists had expected.

The drop in annual consumer price inflation from April’s 2.3 per cent reading was in line with economists’ median expectation in a Reuters poll and marks a sharp decline from the 41-year high of 11.1 per cent reached in October 2022.

The fall has been sharper than in the euro zone or the United States, where consumer price inflation in May was 2.6 per cent and 3.3 per cent respectively, belying concerns a year ago that British inflation was proving unusually sticky.

Even so, consumer prices are up about 20 per cent in the past three years, squeezing living standards and contributing to the unpopularity of Sunak’s Conservatives, who are about 20 points behind the opposition Labour Party in opinion polls.

The BoE has said a return of inflation to its target is not enough on its own for it to start cutting interest rates.

While most economists polled by Reuters think it will start to cut interest rates from its 16-year high of 5.25 per cent in August, financial markets think a first move is more likely in September or October – and see just a 10 per cent chance of a cut this week.

The most recent fall in inflation was driven by a cut in regulated household energy bills in April – the effect of which will fade later in the year, when the BoE forecasts inflation will rise again.

This post was originally published on Michael West.