Prices in the UK rose by 2% in the year to May 2024, down from 2.3% the month before, and the lowest rate in almost three years.
It means inflation has finally hit the Bank of England’s 2% target. However the Bank is expected to keep rates on hold at 5.25% on Thursday – their highest level for 16 years.
What does inflation mean?
Inflation is the increase in the price of something over time.
For example, if a bottle of milk costs £1 but is £1.05 a year later, then annual milk inflation is 5%.
How is the UK’s inflation rate measured?
The prices of hundreds of everyday items, including food and fuel, are tracked by the Office for National Statistics (ONS).
This virtual “basket of goods” is regularly updated to reflect shopping trends, with vinyl records and air fryers added in 2024, and hand sanitiser removed.
The ONS monitors price changes over the previous 12 months to calculate inflation.
CPI fell in May due to a slowdown in price rises in a number of spending categories, including food and soft drinks, recreation and cultural, and furniture and household goods.
Why are prices still rising?
Inflation has fallen significantly since it hit 11.1% in October 2022, which was the highest rate for 40 years.
However, that doesn’t mean prices are falling – just that they are rising less quickly.
Inflation had remained above the Bank of England’s 2% target partly because of high energy and food prices.
Food prices are still 25% higher than at the beginning of 2022, and petrol prices are increasing again.
Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic. Energy prices surged again when Russia invaded Ukraine, cutting global supplies.
Why does putting up interest rates help to lower inflation?
The Bank of England uses interest rates to try and keep inflation at 2%.
When inflation was well above that target, it increased interest rates to 5.25%.
The idea is that if you make borrowing more expensive, people have less money to spend. People may also be encouraged to save more.
In turn, this reduces demand for goods and slows price rises.
But it is a balancing act – increasing borrowing costs risks harming the economy.
For example, homeowners face higher mortgage repayments, which can outweigh better savings deals.
Businesses also borrow less, making them less likely to create jobs. Some may cut staff and reduce investment.
When will inflation and interest rates go down?
Although the headline CPI figure has hit the 2% target, the Bank also considers other measures of inflation when deciding how to change rates, such as “core inflation”.
Core inflation doesn’t include food or energy prices because they tend to be very volatile, but it was 3.5% in May, which suggests price rises are still an issue. Similarly, prices in the service sector are increasing at 5.7%.
When the Bank meets on Thursday 20 June, it is expected to hold the rate at 5.25% for the seventh time in a row.
Financial analysts think there might be a cut at the next meeting on 1 August, but that will depend on the inflation figures for June, which will be released on 17 July.
Are wages keeping up with inflation?
When the impact of inflation is stripped out, pay rose by 2.9% higher.
What is happening to inflation and interest rates in Europe and the US?
Many other countries have also seen inflation and higher interest rates.
At 2%, UK inflation is now below the rate for countries using the euro, which was 2.6% in May, up from 2.4% in April.
In March, the US central bank indicated it could cut its key interest rates three times in 2024.
But in June, the bank kept its key interest rates at between 5.25% and 5.5% – unchanged since July 2023 – and signalled it now expected to cut them just once in 2024.
