Inflation Returns To Target For The First Time In Three Years - But Concerns About Higher Prices And Strong Services Inflation Remain

20th June 2024

CPI inflation has fallen back to the Bank of England's target of 2 per cent for the first time since July 2021 - a welcome return to normality – but worries about the legacy of high prices and stubborn underlying inflation remain, the Resolution Foundation said on Wednesday 19 June 2024

The biggest downward contribution to the fall in inflation in May came from a welcome fall in food-price inflation, which fell to 1.7 per cent in May, the lowest annual rate since October 2021, reflecting falls in food prices. This was partially offset by higher petrol prices.

This month’s data also show that the UK has won the international race to get back to target, being the first among the euro area and US to bring headline inflation back down to 2 per cent. In fact, the UK currently has the lowest headline inflation rate in the G7 bar Italy.

But, despite this positive news, the impacts of sustained high inflation over the past three years will remain with us for some time, with the relative cost of essential goods – particularly energy and food prices – expected to remain high.

The Foundation notes that overall prices have risen by 22 per cent since July 2021 (when inflation was last at 2 per cent), while energy prices have risen by 66 per cent and food by 31 per cent. This has put Britain’s poorest families under significant strain, as they spend a greater proportion of their income on essentials compared to richer households.

More concerningly for the Bank of England, the normalisation of the overall measure of inflation is not reflected under the surface. While goods inflation has been very weak with prices down 1.3 per cent over the past year, services inflation has proved more stubborn, with services inflation coming in at 5.7 per cent in May compared to the Bank’s most recent forecast of 5.3 per cent.

James Smith, Research Director at the Resolution Foundation, said:

"It’s very welcome to see headline CPI inflation falling back to its 2 per cent target for the first time since July 2021. And while the UK experienced a higher inflation peak during the cost-of-living crisis, it has now got back to target more quickly than either the US or euro area.

“But the legacy of a long period of very high inflation means there is unlikely to be much of a feel-good factor among families, as they continue to struggle with the higher cost of essentials.

“And while headline inflation is back to normal levels, domestically-driven services-price inflation remains elevated. This inflation will worry the Bank of England, and may give pause for thought when it comes to cutting interest rates."