In the final print of the crucial economic indicator before the July national elections, the Office for National Statistics reported on Wednesday that U.K. inflation dropped to the Bank of England’s objective of 2.0% in May.

The headline number decreased from 2.3% in April and was consistent with the 2% forecasted by Reuters’ panel of analysts.

Shortly after the announcement, sterling saw a little increase, and by 7:33 a.m. London time, it was trading at $1.2721.

Given its prominence in the British economy and its representation of domestically produced price increases, services inflation is constantly monitored by the BOE. In May, it was 5.7%, down from 5.9% in April.

Core inflation, which does not include energy, food, drink, or tobacco, decreased from 3.9% in April to 3.5%.

The ONS said that while automotive fuel prices continued to rise, falling food prices accounted for the majority of the decreases.

The weakest growth in grocery sales in the past two years was caused by unseasonably bad weather, according to data released on Tuesday by U.K. market research firm Kantar. According to the index, grocery sales increased 1.0% in the four weeks leading up to June 9, which was the sixteenth consecutive month that food inflation declined.

Azad Zangana, senior European economist and strategist at Schroders, issued a warning that rising pressure might resurface in the second half of the year as the U.K. phases off its energy price limit, even if the most recent report keeps inflation in line with the BOE’s objective.

“From the third, fourth quarter onwards, you might start to see a bit more upward pressure coming through as the Bank of England has warned,” he said.

When the Bank meets again on Thursday, Zangana hinted that it may even “surprise” the market by cutting interest rates this week. Other than that, it is generally anticipated that the Bank would maintain rates at 5.25%, where they have been since August 2023, when inflation was around 7.9%.

However, markets are increasingly pricing in a short-term decrease as inflation is approaching the objective. Financial markets are pricing in a reduction in interest rates in September, while 65 experts surveyed by Reuters last week stated that they anticipated a cut in rates in August. Only two of them disagreed.

The economy is doing well as the United Kingdom prepares for its general election on July 4, which polls indicate will be won handily by the opposition Labour party.

(Adapted from CNBC.com)

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