UK inflation continued to ease in May, with the headline rate at 2.0% year-on-year, down from 2.3% in the 12 months to April, marking the lowest rate since July 2021. Core inflation was 3.5%, while services prices remained high at 5.7%. The largest downward pressure came from food prices, while motor fuels and transport costs drove inflation up. The Bank of England (“BOE”) held interest rates at 5.25%, emphasising the need for restrictive monetary policy to control inflation. Market expectations for an August rate cut increased to more than a 50% chance after the news, up from 30%. By year-end, 0.50% of rate cuts are now priced in. Economists are divided on whether the BOE will reduce rates in August or later, with some expecting a delayed cut followed by faster easing. Tight fiscal policy under a new government could lead to a more rapid easing cycle next year. The biggest risk to early BOE easing is a stronger economy with rising price pressures and wages. The BOE forecasts headline inflation to rise above target from the autumn and will use updated macroeconomic projections at its next meeting...

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