Inflation drops to target for the first time in three years

The Office for National Statistics revealed that annual inflation dropped to the Bank of England’s target of 2% from April to May.

This fall is mainly because food and soft drink inflation dropped slightly. It doesn’t mean food prices are falling – just that they’ve been rising at a slower pace. Food prices are still 25% higher than at the beginning of 2022.

The figure comes ahead of the Bank of England’s decision on UK interest rates tomorrow.

Interest rates influence the cost of borrowing money, and how much you get for saving. So a high interest rate means you’re charged more for borrowing money and should be paid a higher percentage on your savings.

The Bank has attempted to lower inflation to 2% by steadily increasing interest rates since December 2021. Raising interest rates means people tend to borrow less and therefore spend less, which usually causes prices to rise less quickly, and inflation slows.

Many hope reaching the inflation target will convince the Bank to lower the interest rate, but experts are predicting it will stay at 5.25%.

That’s because falling inflation doesn’t mean we’ve beaten the cost-of-living crisis yet. Many are concerned that inflation of service costs and home ownership costs only fell from 5.9% to 5.7% from April to May.

‘Core inflation’ – which excludes price changes in energy and food – fell to 3.5% in May, as predicted by experts.

But the cost of petrol has gone up, and energy bills, rents and mortgages have soared. Average rent paid to private landlords rose by 8.7% in the lead-up to June.

Experts say it’s more likely the Bank will cut interest rates in the coming months.

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The Bank of England is set to announce the new interest rates tomorrow. Check back with us to find out what they decide.