Inflation in the U.K. returned to the Bank of England's (BoE) target rate of 2% for the first time in nearly three years, official figures showed Wednesday, a development that has been seized on by the governing Conservative Party that its economic plan is "working" ahead of the July 4 election.

Still, underlying price pressures remained strong in May, meaning the Bank of England is likely to wait longer before cutting interest rates.

The Office for National Statistics (ONS) said inflation, as measured by the consumer prices index (CPI), fell to 2% in the year to May from 2.3% the month before with food prices providing the biggest downward contribution.

Though the decline merely means that prices are rising at a slower rate than they have for the past few years during one of the cost of living crises, Conservative Prime Minister Rishi Sunak sought to take credit for the fall and argued it was further evidence that the "economy has now turned a corner."

However, Rachel Reeves, who will become Treasury chief if the main opposition Labour Party wins the election, said working people are "worse off," with mortgage rates higher than they have been for years and taxes at a 70-year high.

The data showed services price inflation, which the BoE thinks gives a better picture of medium-term inflation risks, was 5.7%. That was down from 5.9% in April but not as big a drop as the 5.5% economists had forecast in a Reuters poll.

Sterling rose modestly against the U.S. dollar and the euro after the data.

"(BoE) Governor (Andrew) Bailey is likely to be the happiest man in the Square Mile this morning," said Michael Brown, senior research strategist at currency brokers Pepperstone.

The fall in inflation follows nearly three years of above-target inflation. The last time inflation was at 2% was in July 2021 before prices started to shoot up, first as a result of supply chain issues during the coronavirus pandemic and then by Russia's invasion of Ukraine, which pushed up energy costs.

The annual consumer price inflation had hit a 41-year high of 11.1% in October 2022.

The fall has been sharper than in the eurozone or the United States, where consumer price inflation in May was 2.6% and 3.3% respectively, belying concerns a year ago that British inflation was proving unusually sticky.

Despite the decline, few economists think the Bank of England will reduce its main interest rate from a 16-year high of 5.25% on Thursday.

Some policymakers are still concerned over the scale of price rises in the crucial services sector and the pace of wage increases, which raise the risks of an inflation rebound if interest rates are cut too soon.

The consensus in financial markets is that rates will be cut in August.

"Despite this landmark fall in inflation, concerns over both underlying price pressures and changing policy in the run-up to a general election means a June interest rate cut is almost certainly off the table," said Suren Thiru, economics director at The Institute of Chartered Accountants in England and Wales

Though the bank is independent of the government, there's also a general expectation that policymakers will hold the line during an election campaign.

The Bank of England, like the U.S. Federal Reserve (Fed) and other central banks, raised interest rates aggressively in late 2021 from near zero to counter the rapid increase in inflation, which hit a high above 11%.

Higher interest rates – which cool the economy by making it more expensive to borrow – have helped ease inflation, but they've also weighed on the British economy, which has barely grown since the pandemic rebound.

The BoE has said a return of inflation to its target is not enough on its own for it to start cutting rates.

"Rate-setters will still need to weigh the fall in headline inflation against signs that domestic price pressures, such as elevated pay growth, are proving slower to come down," Martin Sartorius, principal economist at the Confederation of British Industry, said.

The most recent fall in inflation was partly driven by a cut in regulated household energy bills in April – the effect of which will fade later in the year, when the BoE forecasts inflation will rise again.

Lower food prices were the biggest factor pushing down on inflation in May, reducing the annual rate of inflation for food and non-alcoholic drinks to 1.7% from a 45-year high of 19.2% in March 2023.

Consumer prices in Britain are up around 20% over the past three years, squeezing living standards and contributing to the unpopularity of Sunak's Conservatives, who are around 20 points behind the opposition Labour Party in opinion polls.

Sunak said in a video clip that the drop in inflation since he took over from his Conservative predecessor Liz Truss – whose fiscal policy triggered a surge in government borrowing costs – was evidence that his economic policies were working.

"Let's not put all that progress at risk with Labour," he said.

Labour's Reeves said the Conservatives would bring "five more years of chaos."