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UK in focus: Inflation falls back to 2%

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Economic activity in April was mixed while the labour market continued to soften. UK headline inflation rate fell to 2% in May, in line with the Bank of England’s target. Nonetheless, the Bank of England left interest rates unchanged at 5.25%.

GDP growth flatlined in April

The UK economy did not grow in April after a strong 0.4% m-o-m rise in March. Although this was in fact better than expected given the wet weather throughout the month weighing on retail and construction activity. The services sector was the outperformer and the only sector to report growth, +0.2% m-o-m. Meanwhile, demand was weaker across construction (-1.4% m-o-m) and industrial production (-0.9% m-o-m).

Labour marked data showed further moderation in demand

Demand for labour has moderated over the last year despite the more recent pick-up in activity. In the three months to April the number of people employed fell -0.4% 3m/3m and vacancies in May were also down. However, the number of vacancies is still elevated, and recruitment difficulties remain amid constrained labour supply. The rate of inactivity rose to a nine-year high of 22.3%, of which, over 80% report they ‘do not want a job’. On pay, despite the 9.8% rise in the National Living Wage in April, data for overall average pay did not rise at an expected elevated rate and as such the 3m/yr rate was unchanged at 6.0%.

Inflation fell back to the BoE’s 2% target in May

Headline CPI inflation fell from 2.3% to 2% y-o-y, positive news for the Bank of England who targets a 2% inflation rate. And the core rate of inflation fell to 3.5% y-o-y from 3.9% previously. However, the drivers of the 2% inflation rate paint a less positive picture. Goods price inflation fell further into deflation to -1.3% y-o-y, substantial progress from its recent peak of 14.8% in October 2022. Conversely, services price inflation - at 5.7% y-o-y down from 5.9% y-o-y in the month prior - remains elevated and is moderating at a much slower pace.

Bank of England leaves interest rates unchanged

The BoE Monetary Policy Committee voted 7-2 to leave interest rates unchanged at 5.25% for a seventh consecutive meeting. A divided committee highlights the uncertainty as to the path of interest in the near term. To find out more about our views on the future of interest rates click the link below.

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