On May 22, the latest data from the UK Office for National Statistics showed that the Consumer Price Index (CPI) rose by 2.3% year-on-year in April, a significant decrease from the 3.2% increase in March, reaching the lowest level since the summer of 2021.

Specifically, the decline in household energy prices has driven down the overall level of CPI. In April, the traditional dual-fuel energy bill for households fell by 12% to £1,690 per year, reducing the inflation rate by approximately 0.4 percentage points. Additionally, commodity prices recorded their first decline since February 2021, falling by 0.8 percentage points compared to the same period last year. Grant Fitzner, the Chief Economist at the Office for National Statistics, stated that inflation in food prices is gradually easing, with supermarket goods prices rising by only 2.9% in April, far below the peak of 20% last year.

Despite the bumpy downward trend in inflation, the data still exceeds the 2.1% increase expected by the Bank of England and economists, indicating that price pressures in some areas of the UK economy remain stubborn. Firstly, the inflation in the UK service sector has remained high, with April's 5.9% level almost unchanged from March's 6%. Moreover, after excluding food and energy prices that are subject to greater volatility, the core inflation in the UK for April was 3.9%, only slightly lower than the 4.2% in March. The World Bank believes that the UK's road to combating inflation is still "arduous and long", with an expected slight increase in inflation to 2.6% in the second half of the year, and a sustained decline to the target level only expected by early 2026.

In light of the slower-than-expected deceleration of inflation in the UK, traders have significantly reduced their bets on interest rate cuts by the Bank of England. The market no longer expects a 100% probability of two rate cuts of 25 basis points each this year. The market expects a rate cut of 39 basis points by the end of the year — equivalent to one rate cut, with the possibility of a second cut at about 60%; whereas on Tuesday, a 54 basis point cut was expected. Currently, the market is betting that the Bank of England will make its first rate cut no later than August.

At the most recent monetary policy meeting, the Bank of England kept the interest rate at 5.25 percentage points for the sixth consecutive time. Bank of England Governor Bailey expressed "optimism" that the era of rising inflation has ended. However, he remained evasive about the timing of rate cuts, stating, "Neither ruling out the possibility that the Monetary Policy Committee will cut rates at the next meeting, nor considering a rate cut at the next meeting as a foregone conclusion."

In response to these data, UK Shadow Chancellor of the Exchequer Rachel Reeves said that now is "not the time for the Conservative Party to pop champagne corks and boast of victory." She added, "The economic situation facing the UK remains severe, with households in dire economic circumstances, soaring commodity prices, increased mortgage costs, and taxation at a 70-year high."

Yael Selfin, the Chief Economist at KPMG UK, also believes that although inflation is falling closer to the Bank of England's target, it may not be sufficient to persuade the bank to cut rates in June. Tomasz Wieladek, Chief Economist at T. Rowe Price, said that if inflation data maintains this strong momentum, the possibility of a rate cut this summer is smaller, and a rate hike may need to be reconsidered.

The next Monetary Policy Meeting of the Bank of England will take place on June 20.