UK Inflation Drop Falls Short, Bank of England Rate Cut Less Likely

Despite a significant drop in inflation to 2.3%, the fall was less than expected, causing investors to reconsider bets on a Bank of England rate cut next month. This scenario poses challenges for Prime Minister Rishi Sunak ahead of upcoming elections, with core and services inflation remaining stubbornly high.

(Adds economist quote, core inflation, political outlook) LONDON, May 22 (Reuters) -

Inflation in Britain fell by less than expected, prompting investors to cut their bets on a Bank of England rate cut next month which would have given a boost to embattled Prime Minister Rishi Sunak before an election this year. Consumer prices rose by an annual 2.3%, down sharply from a 3.2% increase in March and its lowest since July 2021 when it stood at 2.0%, the Office for National Statistics said.

But the BoE - which has an inflation target of 2% - and economists polled by Reuters had forecast a bigger drop to 2.1%. Services inflation - a key gauge of domestically generated price pressure for the BoE - was much higher than expected, while petrol prices also rose.

Sterling jumped after the data and investors priced the chance of a BoE rate cut in June at just 18% down from 50% on Tuesday. Economists had widely expected a sharper drop in inflation, citing a 12% drop in regulated household energy tariffs that took effect last month.

"While inflation continues to fall sharply, this report will come as a disappointment to the Bank of England and investors looking for a rate cut in June," said Luke Bartholomew, senior economist at asset manager abrdn. "In particular the strength of core inflation and services inflation, both of which came in a fair bit stronger than expected, will make it harder for the Bank to feel confident that underlying inflation pressure is cooling adequately."

Services inflation only inched down to 5.9% from 6.0% in March. The BoE's forecasts and the Reuters poll had pointed to a reading of 5.5%.

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