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. As the CPA has highlighted previous, however, financial market expectations of Bank of England rate cuts have been extremely volatile and, as recently as the start of March, some macroeconomic forecasters were anticipating five rate cuts this year.

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