Consumer price inflation is on target at 2%. So is it game over for the cost of living crisis?

No. But it’s a good start.

Read on…

An imaginary basket of 700 goods and services bought by households has gone up in price by 2% in the year to May, down from 2.3% in the year to April.

In autumn of 2022, the consumer price inflation (CPI) rate peaked at 11.1%. Energy prices had soared in the wake of disruption to Russian oil and gas imports. Liz Truss’s tax-cutting mini-budget was piling more demand into prices.

The fall in price inflation does not mean that prices are falling. Some fall, but overall, the cost of that basket is now not rising as fast.

And while inflation is down and back on target, the past two years have left prices much higher than they were. Food, for instance, is 25% more expensive than it was. So for many whose income rise has not matched price increases, the cost of living pressures remain.

This month’s figures show food inflation down to 1.7% over the year to May, from 2.9% in the year to April. Easing that price inflation rate were bread and cereals, vegetables, sugar, jam, syrup, chocolate and sweets. Still going up were cooking oils, dairy and eggs.

The cost of buying a pet is easing, after the pandemic saw prices soar. Also bearing down on price inflation are package holidays, books, vacuum cleaners, fridges, freezers and washing machines.

Offsetting that has been the cost of petrol, with a litre of unleaded up 4p on May last year, though in that transport category, the average price of a used car has fallen by more than 11% in a year, with the unwinding of disruption to manufacturing of cars during the pandemic.

Housing is not included in the CPI figure, but it obviously has an impact on household budgets. While housing is not as high a cost in Scotland as it is in parts of England, it has been rising.

Figures from the Registers of Scotland show the average house transaction rose in the year to April by 4.5%, despite mortgage rates at relatively high levels. In England and Wales, prices have been falling but were up 1.1% in the most recent 12 months.

That rise has been seen across 27 of Scotland’s council areas, but the latest figures continue a downward trend in Aberdeen and slightly lower prices in Highland.

Since the start of 2020 and of the pandemic, the average house price in Scotland has risen by 25%.

There are also fresh figures on renting a home, with Scotland again seeing a sharper increase than England and Wales. The evidence on new tenancies shows the average monthly payment up by 9.3% on May of last year. While there are wide variations on rental, the Scottish average last month was £957.

That increase is despite Scottish government measures to dampen rent increases with a freeze and then a rent cap. New tenancies are not included in that cap, and it seems landlords have taken the opportunity of new leases to put up prices ahead of further rent controls.

Price increases come from external pressures, so rising international prices for energy and food were a big part of the problem.

Other rising costs can be within Britain, so labour shortages for some sectors have been pushing up pay, which companies pass on to customers. The UK government takes some credit for pushing price inflation down through its resistance to wage inflation in the public sector. That signal and rising unemployment can have the effect of dampening pay rise expectations.

Prices can also be pushed up by increasing demand for goods and services, which is why the Bank of England uses the cost of borrowing to push down demand.

Yes, there is some concern that there remain pressures within the economy that could push it up, as well as the risk from those external factors, such as global energy prices.

In the domestic economy, the latest figures show the cost of services – from banking to a haircut – have gone up much more than the cost of goods. The service sector dominates the UK economy.

Part of the reason for that is that pay increases have remained relatively high, which can lead to inflation if other groups of workers push to match the 5.9% pay inflation rate in the most recent figures.

The Bank of England’s monetary policy committee (MPC) will tell us on Thursday at noon if it intends to cut its base rate for borrowing from 5.25%.

Many borrowers got used to exceptionally low interest rates after the banking crisis in 2008. Price inflation brought a response from central banks, such as the Bank of England, to stifle demand with higher borrowing costs.

Some countries have begun to cut their borrowing costs, but not yet in the UK. That is taking longer than expected because of these continued indications of inflation in services and pay.

Economists do not expect to see a cut in the base rate this week and look to the next MPC meeting in August.

A little inflation is seen as a good thing. If the target was to be set at zero, an undershoot on that by tightened borrowing and demand would risk prices deflating, and that is dangerous for the economy. It means people put off spending in the expectation they can buy more cheaply in future, and that spirals into a trap.

The 2% target is used by around 60 central banks around the world, and was set as the target for the Bank of England in 1997, at the point it was made independent of the Treasury.

The level of inflation is not as important as stability in prices. It is good for the economy if businesses, workers and consumers can reliably predict where prices will be over time.