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Tumbling air fares and car prices see UK inflation hit 2% target

Edmund Heaphy
Finance and news reporter
A shopper on London's Oxford Street. Photo: Jack Taylor/Getty Images

Falling air fares and car prices contributed to a modest fall in the rate of inflation in May, with the consumer price index hitting the Bank of England’s 2% target.

By and large, analysts had predicted that the rate of inflation had fallen in May from 2.1% in April, with the month seeing only a small rise in fuel prices.

The timing of Easter, which fell in April this year, meant that fares for transport services fell in May, the Office for National Statistics (ONS) said.

Air fares declined by 5.2% compared to a 10% increase in the same month in 2018.

Car prices, which fell by 0.3%, and a moderate 4.2p per litre growth in the cost of petrol also contributed some downward pressure, the ONS noted.

Meanwhile, house prices fell in London in April, according to separate data released on Wednesday.

But the cost of renting climbed in the capital, with the ONS suggesting that demand for rental properties continues to outstrip supply.

“Annual house price growth remained subdued but was strong in Wales, which showed a pronounced increase on the month,” said Mike Hardie of the ONS.

“In London, house prices continued to fall over the year but rental price growth there strengthened.”

The 2% inflation figure means that price growth is now exactly on the Bank of England’s target, and comes a day before the central bank will announce its latest interest rates decision.

While analysts expect that the bank will leave rates unchanged, it may signal that interest rate hikes are around the corner.

The bank’s chief economist, Andy Haldane, has noted that he thinks rates should be increased soon in order to keep inflation in check.

READ MORE: What to expect from Bank of England's interest rate decision

While its benchmark interest rate remains at a historic low, markets think that hikes are unlikely until a solution to the Brexit stalemate is found — and until the UK’s economy noticeably picks up.

Inflation hitting the 2% target means that the case for rate hikes has weakened slightly, with the bank expecting it to fall below target in the coming months.

“Although it would likely prefer to tighten monetary policy, which remains extraordinarily loose, with inflation around target, economic growth crawling along and no clarity on the future path on Brexit, its hands are tied,” said Mike Jakeman, a senior economist at financial services firm PwC.

Some analysts had predicted that the rate of inflation had climbed to as much as 2.2% in May.

In April, the cost of housing, water, electricity, gas, and other fuels jumped significantly, pushing the annual rate of inflation to its highest in four months.