UK Inflation Dips to 3.4%, Posing Challenge for Bank of England on Interest Rates

UK inflation dropped to 3.4% last month as retail prices declined, adding complexity to the Bank of England’s upcoming interest rate decision on Thursday.

Despite the fall in the consumer prices index (CPI) for May, the Bank is still widely expected to keep interest rates steady at 4.25%. However, the decrease may increase expectations of rate cuts later in the summer or autumn.

Economists had accurately forecast the CPI drop from April’s 3.5% to 3.4%, although inflation still remains above the Bank’s 2% target.

A recent slowdown in economic activity has put additional pressure on the Bank to consider lowering borrowing costs. Between February and April, wage growth eased, unemployment rose, and the economy contracted in April.

Earlier this month, the Office for National Statistics admitted to overestimating April’s CPI rise due to miscalculations related to increased vehicle tax. The error also affected the retail prices index, which was reported at 6.4%, 0.1 percentage points higher than it should have been.

While the ONS kept the initial figures unchanged, it has committed to using the corrected data in its future reports.