UK Inflation Falls to 3.4% in May, Aligns with Market Forecasts

UK Inflation Falls to 3.4% in May, Matches Market Expectations

UK Consumer Price Index (CPI) inflation eased to 3.4% year-on-year in May, in line with market expectations and slightly down from 3.5% in April, according to data released Wednesday by the Office for National Statistics (ONS). The reading moves inflation closer to the Bank of England’s (BoE) 2% target, fueling speculation over possible rate adjustments in the coming months.

Core and Services Inflation Also Fall

The core CPI, which strips out volatile items like food and energy, dropped to 3.5% YoY, below both April’s 3.8% and the forecasted 3.6%. Meanwhile, services inflation—a key metric for the BoE—fell to 4.7% in May from 5.4% in April, marking a notable cooldown in price growth pressures.

GBP/USD Reaction Remains Muted

Following the data release, GBP/USD hovered around 1.3450, showing little directional bias. Market participants appear to be waiting for further cues from the BoE policy outlook, as inflation continues its gradual return toward more sustainable levels.

Policy Implications for the Bank of England

Although inflation remains above the central bank's target, the softening pace—especially in services and core components—increases the likelihood of a dovish tone at upcoming Monetary Policy Committee (MPC) meetings. Traders will be closely watching forward guidance and any revisions to the BoE’s economic projections.

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