UK Annual Inflation Rate Falls from 2.3% to 2.0% in May

UK Consumer Price Inflation Report for May 2024

On Wednesday, June 19, the UK inflation report for May drew significant investor attention, coming just before the Bank of England monetary policy decision.

According to the report, the UK annual inflation rate fell from 2.3% to 2.0%, with the core inflation dropping from 3.9% to 3.5%. Economists forecast an inflation rate of 2.0% and a core inflation rate of 3.5%.

Moreover, in May, consumer prices rose by 0.3% month-on-month, following a 0.3% increase in April. Economists expected consumer prices to increase by 0.4%.

According to the Office for National Statistics, several key trends emerged:

The Consumer Prices Index, including owner-occupier housing costs (CPIH), increased by 2.8% in 12 months to May (April: +3.0%).

• Food prices had the most marked downward contribution.
• The annual inflation rate for food and non-alcoholic beverages declined from 2.9% to 1.7%.
• The largest upward contribution came from motor fuels.
• Prices for transport were up 0.3% compared with May 2023 (April: -0.1%).
• The Core CPIH (excluding energy, food, alcohol, and tobacco) rose by 4.2% in 12 months to May 2024 (April: 4.4%).
• The CPIH services annual rate softened from 6.0% to 5.9% in May.

Bank of England Interest Rate Path

Looking ahead, the Bank of England will announce its June interest rate decision on Thursday, June 20. While economists expect the BoE to hold interest rates at 5.25%, the latest inflation numbers could play a pivotal role in influencing the BoE vote and subsequent guidance.

Furthermore, the May inflation report could fuel investor bets on an August interest rate cut. The BoE will hold a press conference after the August announcement, allowing BoE Governor Andrew Bailey to outline the rationale for an interest rate cut.

GBP/USD Reaction to the May UK Inflation Report

Before the UK inflation report, the GBP/USD fell to a low of $1.26908 before climbing to a high of $1.27134.

However, in response to the inflation report, the GBP/USD fell to a low of $1.27025 before rising to a high of $1.27247.

On Wednesday, June 19, the GBP/USD was up 0.04% to $1.27130.

Up Next

Later in the session on Wednesday, the US NAHB Housing Market Index will garner investor interest. Economists forecast the NAHB Housing Market Index to remain steady at 45 in June.

The numbers are unlikely to influence the Fed rate path, with the Fed focusing on wage growth, consumer spending, and the services sector.

Nevertheless, economists consider the US housing sector a barometer for the US economy. An improving housing market environment could boost consumer confidence and spending. Upward trends in consumer spending may fuel demand-driven inflation while contributing to US growth.

Beyond the numbers, investors should monitor FOMC member commentary. Comments regarding inflation and the timing of an interest rate cut could affect market risk appetite.