Inflation in the UK has fallen close to the Bank of England’s 2% target, but still came in higher than expected in a blow to hopes of an interest cut this summer.
The rate of price rises in the UK dropped to 2.3% in April, according to the Office for National Statistics (ONS). That is the lowest rate since July 2021.
It’s still 0.3 percentage points higher than the 2% figure the Bank of England aims for, however.
The fall, from 3.2% in March, was driven mostly by a decline in the energy price cap, which led to cheaper gas and electricity bills. The price cap was £3,116 per year from April to June 2023, but fell all the way to £1,690 per year for April to June 2024.
In addition, food and services prices moderated significantly, thanks in part to high comparatives in April 2023, when inflation was still 8.7%.
Prices of food and non-alcoholic beverages rose by 2.9% , down from 4.0% in the year to March. The April figure is the lowest annual rate since November 2021.
ONS Chief Economist Grant Fitzner said: “There was another large fall in annual inflation led by lower electricity and gas prices, due to the reduction in the Ofgem energy price cap.
“Tobacco prices also helped pull down the rate, with no duty changes announced in the budget. Meanwhile food price inflation saw further falls over the year. These falls were partially offset by a small uptick in petrol prices.
“The prices of goods leaving factories have risen a little over the last year. Meanwhile, the prices of raw materials and fuels grew in the last month, though they remain below where they were a year ago.” The headline inflation figure approaching the Bank of England’s target may lead to some calls for the Monetary Policy to cut interest rates at its next meeting in June, but today’s figures appear to make a cut less likely.
While the Bank targets a headline inflation figure of 2%, it aims to achieve this in the medium term, and keep the inflation rate at that figure. As a result, it will sometimes look past short-term indicators like the headline rate itself as it focuses more on data that better reflects the bigger picture of where prices are going.
There will be concern that services inflation only fell from 6% to 5.9% compared with expectations of 5.4%. Core inflation, a measure that excludes food and energy costs, also fell less than expected from 4.2% to 3.9%. Both are watched closely by the Bank of England.
With both core inflation and services inflation both remaining higher than the Bank would like, home buyers may have to wait longer than hoped for an interest rate cut. A cut in June now appears unlikely, with hopes now turning to August or September.
Paul Dales, Chief UK Economist at Capital Economics, said: “The smaller-than-expected fall in CPI inflation from 3.2% in March to 2.3% in April (BoE & consensus 2.1%, CE 1.9%) makes a June rate cut unlikely and casts some doubt over August too. To some extent, it also makes our forecast that rates will fall from 5.25% now to 3.00% next year look more challenging.
“Even though there is still a wages and a CPI release to go before the BoE meeting on 20th June, it feels as though a cut then now seems very unlikely. Even a cut in August is looking a bit more doubtful.”
Craig Fish, director at East London mortgage broker Lodestone Mortgages & Protection, said: “Close but no cigar, is how this number can be described. A big drop but not as much as hoped or expected by the Bank of England. As a result it will likely be business as usual at the next MPC meeting resulting in a hold in base rate and misery for those with, or looking for, a mortgage. We live in hope of the next set of data.”
