As expected, UK consumer prices rose 2.0% year-on-year in May, slowing from the 2.3% annual increase in April and recording their lowest readings since July 2021.
The core CPI, which excludes volatile items such as food and energy, rose 3.5% year-on-year after a 3.9% year-on-year rise in April.
On a monthly basis, the headline CPI rose another 0.3% as markets expected while the core CPI slowed from 0.9% to 0.5%:
- May headline CPI (y/y): 2.0% (2.0% expected, 2.3% previous)
- May core CPI (y/y): 3.5% (expect 3.4%, previous 3.9%)
- May Headline CPI (m/m): 0.3% (0.3% expected & ex)
- May core CPI (m/m): 0.5% (0.2% expected, 0.9% previously)
The report explained that the price slowdown came from eight out of ten sectors, with “Food, Non-Alcoholic Beverages, Entertainment, Culture, Furniture and Household Goods” accounting for the greatest downward pressure while “Transport” prices partially offset the price decline.
In a separate (but concurrent) release, the ONS published factory gate prices for May which showed producer prices falling compared to last year. Monthly Producer Price Index readings also came in below market estimates after showing slight increases in April.
Link to UK Producer Price Index for May 2024
- May PPI inputs (annual): -0.1% (-1.0% expected, -1.4% previously)
- PPI inputs (m/m) for May: 0.0% (-0.1% expected, 0.8% previously)
- May PPI output (y/y): -1.7% (1.9% expected, 1.1% previous)
- PPI output (m/m) for May: -0.1% (0.2% expected, 0.3% previous)
Market reactions
British pound against major currencies: 5 minutes
Overlay of the British pound against the major currencies Chart by TradingView
Prior to the release of the CPI and PPI reports, the British pound was trading within narrow ranges, except for its pair with the Australian dollar, which was supported by positive market sentiment.
Initially, the easing of inflationary pressures sparked discussions about the possibility of the Bank of England cutting interest rates sooner rather than later.
However, traders quickly turned their focus to core inflation, which beat the Bank of England's expectations, and to services inflation – a key concern for the central bank – which remained stubbornly high during the month. Some analysts also suggest that inflation could rise again as the effects of lower energy prices fade in the coming months.
Following the reports, the British pound initially fell but then rose to new intraday highs against its counterparts on waning expectations of a rate cut from the Bank of England. The pound maintained its gains, although it witnessed some profit-taking during the American session, coinciding with the US bank holiday.