Inflation has shrunk – but the question is: are you feeling any richer?

For the first time in almost three years, the Bank of England’s holy grail has been found: inflation for the year to May fell back to its hallowed 2 per cent target, from 2.3 per cent in April.

Food prices, which have long been a black spot, did a lot of the heavy lifting to deflate the figure, having increased by just 1.7 per cent in the year to May compared with 2.9 in the year to April. This was cited as a key contributor by the Office for National Statistics (ONS).

But although the government will be rejoicing at having been granted a decent “retail offer” while out election campaigning on the nation’s doorsteps, we shouldn’t get ahead of ourselves. The price of a weekly shop is still up compared with a year earlier, and the damage from the peak of more than 19 per cent recorded last year is still in the figures. The average shopping bill is more than 25 per cent higher than it was at the beginning of 2022.

However, Capital Economics notes that food-producer price inflation stood at just 0.2 per cent in May. “Food-price inflation will probably soon fall to zero,” said the forecaster. Bring it on.

In total, eight of the ONS divisions contributed to the downward move, with the recreation and culture sector and furniture and household goods joining food as the stars of the show, offset by two risers; transport was the biggest nasty. Feeling any richer yet?

The CPI (Consumer Prices Index) all-goods index – based on all of the things we buy – actually fell by 1.3 per cent, compared with April’s 0.8 per cent decline. This is the sharpest fall in the price of goods for nearly eight years.

Taken together, this data is encouraging. Household budgets were badly strained by the recent inflationary spike – the headline rate peaked at just over 11 per cent in 2022 – and they are still under pressure. But it is easing. The UK’s inflation is now the second lowest in the G7 group of advanced economies, bettered only by that of Italy.

This brings us on to the thorny question of what it all means for interest rates and, crucially, mortgage payments. There, the news is not so cheery. As much as the inflation figures will be welcome news for the beleaguered Rishi Sunak, he is most unlikely to get much help from the Bank of England when it announces its base rate tomorrow.

Core inflation – which strips out the most volatile contributors, including food, fuel and tobacco – came in at 3.5 per cent in the year to May 2024, a chunky fall from 3.9 per cent in the year to April, and well below its high of 7.1 per cent. That was in line with City forecasts, as was the fall in the headline rate. But the fact that this measure of the underlying pressures in the UK economy is still elevated is something to which the Bank of England will pay close attention.

The real monster under the bed, however, was the performance of the all-services index, which rose by 5.7 per cent – only a small improvement over the April figure of 5.9 per cent and a disappointment when set against the consensus City forecast, which called for a rise of 5.5 per cent.

The services sector makes up by far the biggest part of the UK economy (80 per cent), and the price of services is very closely linked to the size of wage settlements. The recent labour-market release from the ONS showed pay increasing at a 5.9 per cent clip.

The Bank’s rate-setting Monetary Policy Committee (MPC) has repeatedly voiced its concerns about this. With the UK in the midst of an election, the MPC is under purdah, so we don’t know what it thinks about the recent data releases.

However, in part because of the election, and based on past statements concerning wages and services, I think it is all but guaranteed that there will be no change to the current base rate of 5.25 per cent.

One thing to watch is how the vote goes. I expect the MPC’s leading dove, external member Swati Dhingra, to vote for a cut. She has consistently called for an early reduction. Interestingly, last time she was joined by Dave Ramsden, the Bank’s deputy governor for markets and banking. The five-strong internal Bank of England team on the committee has tended to vote as a bloc. How Ramsden votes this time may give us some hint about the future pathway for rates.

That is key when considering what this means for mortgage rates. Most people are on fixed-rate deals, and these are priced on the basis of the expected future pathway for rates, expressed through the interest rates swaps market.

The pound strengthened on the news, which tells us that the City isn’t optimistic about an early cut. Any move would help borrowers with mortgages linked to base rates, and would at least improve market sentiment, which might help those looking for fixed deals.

Markets currently place the chances of a cut in August at around 50 per cent. While this latest release was undoubtedly positive, the forecasts suggest that inflation will nudge up again later in the year. I think we’ll have to wait for September at the earliest for that much-anticipated cut.