British inflation, May 2024

British inflation fell to the Bank of England's target of 2.0% in May, the Office for National Statistics said on Wednesday in the latest print of the key economic gauge ahead of July's national election.

The upside fell from 2.3% in April and fell in line with the 2% expectations of economists polled by Reuters.

Sterling rose slightly shortly after the publication, trading at $1.2721 at 7:33 a.m. London time.

Services inflation – which is closely watched by the BOE given its dominance within the UK economy and its reflection of domestically generated price increases – was 5.7% in May, up from 5.9% in the previous month.

Core inflation, which excludes energy, food, alcohol and tobacco, fell to 3.5% from 3.9% in April.

Falling food prices were the biggest contributor to the decline, while car fuel costs continued to show upward pressure, the ONS said.

Unusually bad weather led to the slowest increase in food sales in two years, according to new figures from British market research firm Kantar. Grocery sales rose 1.0% in the four weeks to June 9, marking the 16th consecutive monthly decline in food inflation, according to the index.

While the latest push brings inflation in line with the BOE's target, Azad Zangana, senior European economist and strategist at Schroders, warned that upward pressure could return in the second half of the year as Britain gradually lowers its energy price ceiling abolishes.

“Starting in the third and fourth quarters, you might see some more upside pressure, as the Bank of England has warned,” he told CNBC's “Squawk Box.”

Zangana suggested the Bank could even “surprise” the market with a rate cut this week, at its next meeting on Thursday. Otherwise, the Bank is widely expected to keep interest rates stable at 5.25%, where they were previously since August 2023 – when inflation hovered around 7.9%.

Nevertheless, as inflation moves closer to target, markets are pricing in a short-term reduction. All but two of them are 65 Economists consulted by Reuters last week they said they expected a rate cut in August, while the financial markets are pricing such a rate cut in September.

Melanie Baker, senior economist at Royal London Asset Management, agreed that a rate cut in August seems likely, but added that upcoming data prints should show inflation is falling sustainably.

“A CPI for the services sector around 6% continues to appear, in my view, inconsistent with confidence that you will sustainably achieve a 2% inflation target,” she said in a note.

The economic performance comes as Britain prepares for a July 4 general election, with polls pointing to a landslide victory for the opposition Labor party.

British Prime Minister Rishi Sunak called the latest printed article 'great news' post on the social media platformadding that inflation was now “back to normal”.

Opposition politician Rachel Reeves acknowledged that while inflation is growing at a slower pace, “the cost of living crisis remains acute for many families.”