US inflation slips to lowest level in two years and to more than half of UK rate

Inflation in the US has fallen to its lowest level in two years, setting Britain even further out as suffering the toughest price pressures in the developed world, official figures out today show.

Prices rose four per cent over the year to May, down from a rate of 4.9 per cent in the previous month, the US Bureau of Labor Statistics said.

The headline consumer price index figure was lower than Wall Street’s expected rate of 4.1 per cent.

It means the UK’s inflation rate is more than double than America’s, standing at 8.7 per cent, although the Office for National Statistics has yet to publish estimates for May, which will be released next Wednesday.

Britain’s rate is the highest in the G7.

Inflation across the pond has now more than halved from its summer peak of just over nine per cent, signalling the US Federal Reserve’s series of aggressive interest rate rises is helping to bring down price growth.

However, there were signs within the data that price pressures are still too strong for the Fed’s liking.

Core inflation – which removes items that are subjected to volatile price movements, like food and energy – dropped to 5.3 per cent in May from 5.5 per cent, a smaller fall than Wall Street suspected.

Monthly core and headline inflation is still running at a level that risks the Fed missing its two per cent target.

Chair Jerome Powell will tomorrow announce the outcome of the federal open market committee’s latest round of meetings on what to do with interest rates.

Markets think the Fed will leave borrowing unchanged for the first time in more than a year. The world’s most influential central bank has raised them at every meeting since March 2022 to a range of five and 5.25 per cent.

“Headline CPI inflation fell to a more than two-year low of four per cent in May, thanks to favourable base effects and another sharp drop back in energy prices last month but, with core price inflation still as high as 5.3 per cent, and core prices rising by 0.4 per cent m/m, the Fed is likely to signal tomorrow that it is minded to hike interest rates at the late-July FOMC meeting,” Paul Ashworth, chief north America economist at Capital Economics, said.

A string of much hotter than expected data indicating the UK economy is running hotter than is required to bring down inflation means the Bank of England will eventually surpass the Fed’s interest rate peak, markets are betting.

Numbers out today from the Office for National Statistics revealed wages grew 7.2 per cent over the last year, the biggest increase on record outside of the pandemic. That topped the City and Bank of England’s forecast.

Core inflation climbed to 6.8 per cent in April from 6.2 per cent and purchasing managers’ indexes have suggested the services economy is expanding quickly.

As a result, investors today stepped their bets on the UK’s interest rate peak to 5.75 per cent from around 5.25 per cent. That would take them to their highest level since July 2007, the eve of the financial crisis.