Governor Bailey is likely to be the happiest man in the Square Mile this morning, after the May inflation figures showed headline CPI returning to the Bank of England’s 2% target for the first time since mid-2021, in a fall that continues to be driven largely by lower consumer energy prices, in addition to a significant drag stemming from base effects.
Despite this, removing the effect of both energy and food prices also provides some cause for cautious optimism, with core CPI having risen 3.5% YoY, bang in line with market expectations.
Services inflation, however, is likely to continue to give the MPC’s hawks some cause for concern, having risen 5.7% YoY in May, above both market expectations, and the Bank’s own 5.26% YoY forecast.
Nevertheless, this morning’s data is unlikely to significantly impact tomorrow’s MPC decision, where Bank Rate should be maintained at 5.25%, albeit in a split 7-2 vote, a carbon copy of that seen in May.
Despite today’s figures, the MPC have three reasons to keep policy on hold – the hotter than expected April inflation figures casting some doubt on the pace of disinflation; still-elevated earnings growth, close to 6% YoY; and, perhaps most obviously, the fact that the June meeting falls two weeks before election day, with policymakers not having offered any fresh guidance since the campaign began last month.
Instead, the first 25bp cut still seems most likely to come in August, in conjunction with the Bank’s updated economic forecasts, though such a cut may well prove to be a split decision among MPC members, with one or two of the external hawks likely still concerned about inflation persistence, by virtue of the still-tight labour market, and stubbornly high services inflation.
These concerns are likely to see the ‘Old Lady’ take a relatively cautious pace to normalisation, at least at first, with just one further cut, probably in November, likely before the year is out.
