Ready, steady, not quite yet. This week saw the Bank of England meet to set interest rates. Unlike the European Central Bank, Canadians or Danes, they weren’t quite ready to cut interest rates, and held at 5.25% as forecast. The base rate has now been at this level since August last year. There were two members of the Committee who each voted for a 0.25% cut. Whilst the others voted for no change, for some the decision to hold or cut was finely balanced.

That finely balanced view was perhaps influenced by the release of inflation data earlier that week. The consumer price index for the 12 months to May showed that inflation had returned to the target level of 2%, which was in line with forecast and down from the April reading of 2.3%. Helping drive the figure lower was a further slowdown in food price inflation, whilst prices for housing and utilities, furniture and household equipment continued to decline.

Whilst the return to target has taken longer than most expected, we are now considerably below the high of 11.1% seen in October 2022. So, given inflation is now back at target, why no interest rate cut. Some point to core inflation, which excludes the more volatile components of food and energy. Whilst the rate declined here also, it remains above a level considered comfortable, at 3.5%. At the same time, we have a clear divergence between goods and services inflation. The former is now firmly in deflationary territory, falling 1.3% year on year, a sharp turnaround from the double digit figure previously seen.

Service inflation meanwhile for now remains stubbornly high. Whilst a fall was seen from April, it is still at an uncomfortable 5.7%, above the expected 5.5% for the 12 months to the end of May. The pricing for services is perhaps being driven by a buoyant consumer. The latest retail sales data to May was much stronger than expected, posting growth of 2.9% month on month versus a forecast pick up of 1.6%. Gains were driven by sales at non-food stores.

Perhaps once we see a more meaningful downturn in services inflation, we will see a Bank of England more willing to cut, and of course once we have the general election out of the way.

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