British inflation has returned to its 2% target in May, the first time in nearly three years, according to data released on Wednesday. However, strong underlying price

pressures mean the Bank of England (BoE) is likely to delay cutting interest rates.

This drop in headline inflation is a positive development for both Prime Minister Rishi Sunak and the BoE. Yet, it is unlikely to significantly influence the upcoming election or prompt a rate cut by the BoE on Thursday.

The Office for National Statistics reported services price inflation, a key measure for the BoE, was at 5.7%, slightly down from 5.9% in April but higher than the 5.5% forecasted by economists in a Reuters poll.

Following the data release, Sterling saw a modest rise against the U.S. dollar and the euro. Michael Brown, senior research strategist at Pepperstone, remarked that BoE Governor Andrew Bailey would be pleased but predicted rate cuts might wait until August.

The annual consumer price inflation dropped from 2.3% in April to its lowest since July 2021, marking a steep decline from the 41-year high of 11.1% in October 2022. This fall contrasts with the euro zone and the United States, where May's inflation was 2.6% and 3.3%, respectively, easing previous concerns of unusually persistent British inflation.

Inflation has surged across Western economies since late 2021, initially due to COVID-19 pandemic bottlenecks and later exacerbated by Russia's invasion of Ukraine in February 2022, which drove up natural gas prices. Over the past three years, consumer prices in Britain have increased by about 20%, affecting living standards and contributing to the unpopularity of Sunak's Conservative Party, which trails the opposition Labour Party by around 20 points in polls.

In a video statement, Sunak highlighted the reduction in inflation as evidence of effective economic policies since taking over from Liz Truss, whose fiscal strategies had previously increased government borrowing costs. Sunak warned against risking this progress with Labour policies.

Rachel Reeves, Labour’s likely next finance minister, criticized the Conservatives, suggesting they would bring "five more years of chaos."

The BoE has indicated that merely returning to the inflation target is insufficient for initiating rate cuts. Martin Sartorius, principal economist at the Confederation of British Industry, emphasized that rate-setters would consider domestic price pressures, such as high pay growth, before making decisions.

Most economists in a Reuters poll anticipate the BoE will start cutting rates from the current 16-year high of 5.25% in August. However, financial markets suggest the first cut may come in September or November, with less than a 10% chance of a cut this week.

The recent fall in inflation was largely due to a reduction in regulated household energy bills in April. However, this effect is expected to fade, with the BoE forecasting a rise in inflation later in the year. Lower food prices also contributed to the May decrease, reducing the annual inflation rate for food and non-alcoholic drinks to 1.7% from a 45-year high of 19.2% in March 2023.