UK CPI inflation slowed from 2.3% in April to 2.0% in May, in line with financial market expectations and at the Bank of England’s target rate. Inflation slowing in May was primarily driven by food and non-alcoholic beverages, recreation and culture, and furniture and household goods, partially offset by an upward contribution from transport. Core inflation, which removes volatile food and fuel prices, slowed to 3.5% in May from 3.9% in April. However, the Bank of England closely watches services inflation as an indicator of domestic price pressures as the
global shocks that drove up import prices fade.

This only slowed from 5.9% in April to 5.7% in May, above the 5.5% predicted by analysts and, in response, financial markets lowered their expectations on the first Bank of England rate cut in August to 33% from 45% before the latest figures.

The first rate cut remains fully priced by November but they now have a probability of around 75% of a second rate cut this year, down from 95% beforehand.

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