UK inflation data showed a moderation in consumer price pressures in May. Headline CPI rose 0.3 percent on the month in May, as it did in April, with the inflation rate slowing from 2.3 percent to 2.0 percent, in line with the Bank of England's target level and just below the consensus forecast of 2.1 percent. This is the lowest headline inflation rate since July 2021. Core CPI rose 0.5 percent after a previous increase of 0.9 percent, with the year-over-year increase decelerating from 3.9 percent to 3.5 percent, the smallest increase since October 2021.

Most major categories recorded smaller year-over-year price increases in May, including food, clothing and footwear, and health. This was partly offset by stronger price increases for housing and household services, transport, and communication. Goods prices fell 1.3 percent on the year in May after falling 0.8 percent in April, while the year-over-year increase in services prices eased from 6.0 percent to 5.9 percent.

Ahead of today's inflation data, the consensus forecast was for no change in policy rates at the BoE meeting later in the week. Although today's data showed a further decline in consumer inflation, labour market data published last week suggests wage growth has yet to slow enough to convince officials that inflation can sustainably remain at target.

Following today's inflation data, the UK's RPI measure fell from minus 6 to minus 23, while the RPI-P measure fell from minus 7 to minus 23, indicating that recent UK data are now coming in below consensus expectations.

At 2.3 percent in April versus 3.2 percent in March, consumer prices in April fell sharply but slightly less than expected. May's consensus is 2.1 percent.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. Inflation is an increase in the overall price level of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.