Inflation latest: Landmark fall in inflation - what it means for you and interest rates (2024)

Inflation news
  • Big moment in cost of living crisis as inflation falls to 2%
  • Interest rate cut will be delayed - markets
  • One concerning figure in today's data could delay interest rate cut - economists
  • Analysis:Welcome news but question marks remain
  • How does UK compare with other countries?
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What inflation data could mean for savers

We've been reporting how services inflation - which is much higher than the headline rate at 5.7% - could thwart hopes of an interest rate cut in June or August.

That's potentially bad news for borrowers - but Britons could benefit from savings rates remaining higher for longer than previously thought.

Mark Hicks, head of Active Savings at investment platform Hargreaves Lansdown, said: "Lower inflation will be music to the ears of savers, because if you hold cash in a competitive account, you'll be significantly outstripping inflation.

"Right now, you can still earn more than 5% on everything from easy access accounts to those fixed for up to two years.

"Unfortunately, most people won't be making anything like this, because high street easy access branch rates are far less generous, and in most cases, they pay less than inflation.

"At times like this it's key to check out the rates from online banks and savings platforms, which tend to pay more than the high street giants."


ICYMI: Do Sunak and Hunt deserve any credit at all for bringing down inflation?

From its 40-year high of 11.1% in October 2022, the headline rate of inflation – the consumer prices index (CPI) – is back to the Bank of England's 2% target rate.

The government, naturally, will seek to take credit for it. Rishi Sunak, after all, promised to halve inflation last year and was quick to point to that when it happened.

It was a piece of chutzpah that brought to mind the old saying "success has many fathers, but failure is an orphan".

If anyone deserves credit for bringing down inflation to the target rate, it is arguably the Bank of England, whose interest rate rises from December 2021 to August last year bore down on demand and on some of the inflationary pressures that can build in an economy when demand is too high.

In so far as the government can take credit for bringing down inflation, it is because - since the debacle of Liz Truss's short spell in 10 Downing Street - Rishi Sunak and Jeremy Hunt have restored order to the public finances,calming the panic in markets which erupted when Ms Truss sought to introduce £45bn worth of unfunded tax cuts.

From the depths it plumbed after the mini-budget in September 2022, sterling has rallied by 22% against the US dollar and by 9% against the euro.

All things being equal, that has brought down the cost of goods and services that the UK buys from the US and from countries in the Eurozone, which may at the margins have had an impact on inflation.

In other ways, though, government policies have helped push up inflation. Public sector pay between February and April this year, the latest period for which figures were available, was up 6.4% year on year. That obviously feeds into higher prices.

The government has also just raised the national living wage by 9.8%, the biggest increase in history, which again will feed into higher prices, particularly in sectors such as hospitality. The chancellor has also actively increased inflation by raising taxes on tobacco, as he did last year.

So the government cannot really take that much of the credit for inflation falling to target.

The Bank's Monetary Policy Committee deserves more. So, too, do some of the UK's retailers. The latest figures published by the British Retail Consortium suggest Shop Price Inflation was running at an annual rate of just 0.6% in May - down from 1.3% in March. In other words, by bearing down on prices, retailers are contributing strongly to the decline in inflation. The market is competitive and consumers are benefiting.

In truth, though, most of the heavy lifting in bringing down inflation has come from so-called "base effects" – the impact of the corresponding "base" the previous year.

Prices can still be rising, but contribute to a lower headline rate of inflation. If the price of an item in the inflation basket was rising by 10% in April last year but was only rising by 5% in April this year, that automatically feeds through to a lower headline rate of inflation.

Inflation took off in 2022 mainly because of Russia's invasion of Ukraine, which pushed up the price of oil and – thanks to Ukraine's position as one of the world's biggest exporters of corn, seed oils, wheat and rapeseed – a whole clutch of foodstuffs.

It had another boost when, at the end of 2022 and beginning of 2023, China suddenly relaxed its COVID restrictions – unleashing a big burst of demand from the world's second-largest economy for commodities like oil. That pushed up prices elsewhere.

We have seen big falls in the energy price cap - a major contributor to lower inflation. Some of the biggest elements in the UK inflation basket - food and non-alcoholic drinks, clothing and footwear, furniture and household goods – are not rising in price to the extent that they were a year ago and certainly not to the extent they were in the autumn of 2022.

That is the main reason inflation has come back down to the Bank's target rate.

A version of this analysis was first published a month ago as inflation dipped to 2.3%


Minister is asked if government can take credit for inflation falling to target?

The question arises because the inflation spike was caused largely by external factors - the Ukraine war and subsequent energy crisis.

These factors have subsided, inflation is dropping in comparable economies around the world, and the key lever to squash price rises (putting up interest rates) is with the Bank of England, not the government.

But Work and Pensions Secretary Mel Stride says the government can, "in part", take credit.

He told BBC Radio 4's Today programme: "Can we take credit? In part, yes, because controlling inflation is a matter both of monetary policy, which is interest rates and the Bank of England, but it's also an accommodative fiscal policy to make sure you work in the same direction as the Bank.

"So we had tough decisions to take - for example, around higher-than-inflation wage demands and how we responded to that to keep control of those wage-cost pressures within the economy."


House prices and rent prices continue to increase

House prices in the UK rose for the second month in a row in April, data from the Office for National Statistics shows.

Prices rose by an annual 1.1% to an average of £281,000 after a 0.9% rise in March, figures show.

This will be welcome to some, with Britain's housing market continuing to show signs of recovery from the slowdown in late 2022 and 2023 which was spurred by the surge in mortgage rates.

We also have official - and slightly more up to date - data on the rental market.

Average UK private rents increased by 8.7% in the 12 months to May - down from 8.9% in April.

In the different regions, this looks like an average rental price of £1,301 in England, £736 in Wales, and £957 in Scotland.

This chart shows which regions are driving that increase in rent in England - with London unsurprisingly leading the way.


Will inflation rise again?

Inflation returning to the 2% target is unquestionably positive news - memories are still fresh of 11.1% price rises noted in October 2022's peak.

While nothing like that is expected again any time soon - unless there is a major global shock - the Bank of England has been making noises for a while that it does expect inflation to tick up again later this year.

This could contribute to caution from the Bank in cutting interest rates.

Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, said the Bank should be wary of inflation "rebounding" from June onwards.

"Given that today's data indicates that core inflation remains elevated, this rebound might be sharper than expected," she said.

Analysts at Pantheon Macroeconomics see inflation approaching 3% again as we near winter 2024.

They said this morning: "We expect inflation to hold at 2% in June and then to rise to 2.9% by November.

"Food and non-energy goods inflation have no further to fall now they have converged to producer output price inflation.

"Meanwhile, Ofgem will likely hike the utility price cap by 12% in October after wholesale energy costs have risen.

"We look for CPI services inflation to fall only to 4.8% at the end of 2024."


Pound rises – then falls – as inflation data sinks in

By Daniel Binns, business reporter

The value of the pound initially shot up this morning following news that UK inflation eased in May to the Bank of England's target of 2%.

However, sterling has since eased back slightly after it emerged that services inflation - which covers sectors such as the hospitality industry - was stickier than expected.

It fell to 5.7% in May, less than forecast, prompting predictions the Bank of England might now delay cutting interest rates until September, rather than August as previously thought.

The pound is currently up almost 0.2% against the US dollar, with £1 buying $1.27. Sterling is up a similar level against the euro, with £1 buying €1.19.

A rise in the pound is good for British holidaymakers and importers as their money goes further.

Meanwhile, the FTSE 100 and 250 are both down slightly amid the new rate cut speculation.

Ben Laidler, a markets strategist from eToro, said: "Markets are seeing a bit of indigestion on the details of the inflation report pushing back expectations of a first rate cut."

Top gainers this morning include Vodafone, which is up nearly 1.2% after it sold an 18% stake in Indian telecoms firm Indus Towers for €1.7bn (£1.4bn).

One of the biggest fallers is scientific instrument and equipment firm Spectris, which is down more than 8% on the FTSE 250 on Wednesday.

It comes after the company warned of lower-than-expected profits amid weak demand from China.

Meanwhile, the cost of oil is continuing to creep up, with a barrel of Brent Crude priced at almost $85 (£67) this morning.


Analysis: Welcome news but question marks remain

Inflation falling back to 2%, the magic number as far as the Bank of England and the increasingly desperate Conservative election campaign are concerned, is unequivocally welcome news.

It has been a long road down from the peak of 11.1% in October 2022 and a great deal of hardship has been felt along the way.

The return to earth poses questions for the Bank of England, the government, both current and future and, most importantly, in the real world, where households are desperate for relief from relentless cost pressures.

The most immediate issue is for the Bank, whose Monetary Policy Committee meets today to ponder a decision on interest rates that will be communicated at midday tomorrow.

Even with the CPI rate normalising, no one expects a cut from the current 5.25%. While the headline rate has been reined in, primarily by food prices rising more slowly than a year ago, inflation for all services remains at 5.7%.

This is precisely the sort of "sticky" above-target domestic inflation the Bank has always feared would linger after energy price shocks fell away, and the reason it forecasts the rate will actually rise in the second half of the year.

Analysts believe that far from hastening a cut at the next meeting in August this may push the likelihood back to September, prolonging the discomfort for homeowners coming off fixed rates and those trying to buy or move.

There may also be an electoral factor, with the Bank reluctant to do anything that might play into a febrile environment in which the government claims full credit for falling inflation while the opposition points to the damage left in its wake.

Having been accused of moving too slowly to increase rates, governor Andrew Bailey is in no danger of being charged with moving too fast to bring them down.

For Rishi Sunak and his faltering campaign the news is a fillip entering the final fortnight before polling day. He will claim the credit for the one pledge that has unarguably been met.

Given the influence of external factors, primarily the war in Ukraine, and role of the central bank whose job it is to keep rates in check, how much he can claim for not pursuing policies that would have made it worse is moot.

For Keir Starmer and Rachel Reeves, hoping to become the next prime minister and chancellor in 16 days, there is good news too, though they won't let it show for now. They may be moving into Downing Street at the turning of the economic tide.

Given their reliance on growth to make manifesto pledges even remotely add up with required public spending, they will be praying that is the case.

And what of the real world? Away from Westminster and Threadneedle Street, no statistic, even one as important as inflation, will bring overnight relief.

Real prices for food, energy, clothing and rents are all around 20% higher than they were three years ago and for some mortgage repayments have doubled. That has been deeply corrosive for household incomes, increased Britain's already troubling inequality, and taken a toll on the health and wellbeing of the people the economy relies on to get back to work.

For the first time British households are poorer in real terms at the end of a parliament than they were at the start in 2019.


Interest rate cut will be delayed - markets

In line with our last post, market expectations of an imminent interest rate cut have now fallen away.

Though inflation has dropped to target, services inflation came in higher than anticipated.

High wage growth is also a concern for the Bank of England.

The next base rate decision is tomorrow - followed six weeks later in August and then September.

The last of these now looks most likely for a cut from the 16-year-high of 5.25% down to 5%.

Market expectations for rate cut have hardened this morning:

  • Chance of a cut tomorrow now 5.34%, down from 10.59%
  • Chance of a rate cut in August now 34.5%, down from 42.2%
  • Chance of a rate cut in Sept now 75.2%, down from 79.6%


One concerning figure in today's data could delay interest rate cut - economists

There's plenty to cheer following May's inflation figures - but there's one number that is concerning economists looking at the timing of an interest rate cut.

Interest rates have been raised and kept high to squeeze the economy - when people spend less and save more, price rises (inflation) tend to slow.

In theory, the fall to target inflation of 2% should fire the starting gun on rate cuts from 5.25%.

However, experts at Capital Economics say the fall from 2.3% in April to 2% in May "probably" won't be enough to persuade the Bank of England to cut interest rates from 5.25% tomorrow.

We expected this, as wage growth is still higher than the Bank sees as ideal - and there are concerns inflation will tick up again later this year.

Also, business presenter Ian King says the Bank would be reluctant to act during an election campaign.

Many instead predicted a base rate cut in August, but economists are now worried about that date too.

"With services inflation nudging down only slightly, this leaves our forecast that the Bank will cut rates for the first time in August looking a little shakier," Capital said.

Both the Bank itself and Capital Economics predicted that services inflation would drop from 5.9% to 5.3% - however, it only dropped to 5.7%.

"As a result, today's release won't alleviate the Bank's concerns about persistent price pressures entirely," Capital concluded.

Pantheon Macroeconomics, another industry-leading research firm, agrees.

"The good news is headline inflation has fallen back to the 2% target for the first time since July 2021," it said in its reaction report.

"The bad news is services inflation has proved remarkably persistent, slowing only to 5.7% in May from 6.1% in February, a period when large base effects should have weighed heavily on the year-over-year inflation rate."

With that in mind, Pantheon described the notion that the Bank would cut interest rates in August as "a longshot".

"Services inflation overshooting the MPC's forecast by 40bp makes an August MPC rate cut look like a longshot. We will very likely shift our call for the first MPC cut to September, followed by another in November."

But Pantheon emphasised the headline today is good news.

"Among these repeated upside services inflation surprises it's easy to to miss the big picture that headline inflation has returned to the target, and even if CPI inflation rises it will remain below 3%," Pantheon said.

"This is a far cry from the conditions in place when the MPC raised Bank Rate to 5.25%."


Sunak: Inflation could rise again under Labour

Rishi Sunak says inflation falling to target is "great news" - but warned it could rise again if Labour wins on 4 July.

The prime minister said: "Great news this morning that inflation is back to normal at 2%.

"That's lower than Germany, France and America.

"When I became prime minister, inflation was at 11%.

"But we took bold action. We stuck to a clear plan and that's why the economy has now turned a corner.

"So, let's not put all that progress at risk with Labour. All they would do is spend a load of money, push up inflation and cost every working family £2,000 in higher taxes."

Labour has rejected the Tory claim that it is planning £2,000 of tax rises - and analysts say using the same methodology shows taxes would also rise under the Conservatives.

Chancellor Jeremy Hunt added: "It is welcome news that inflation has returned to the Bank of England's 2.0% target for the first time in three years, lower than in Europe and the United States - because we stuck to the plan.

"There is more to do but with inflation back under control, the last thing families need now is an unaccountable Labour government with a big majority putting up council tax and other taxes by at least £2,094."

Inflation latest: Landmark fall in inflation - what it means for you and interest rates (2024)


What does it mean if inflation is dropping? ›

Inflation is an increase in the price level, or average level of prices, of goods and services. The price level can either increase or decrease. When an economy's price level increases, we call it inflation; when it decreases, we call it deflation. Figure 1. Average Level of Prices in the US, 1973-2023.

What happens to real interest rates when inflation falls? ›

But, let's say you earn a 3 percent nominal interest rate and the inflation rate decreases from 3 percent to 1 percent. In this case, the real interest rate on your money would be 2 percent. Again, inflation makes a difference.

What does inflation do to interest rates? ›

If you have a variable-rate loan, the interest rate on your loan will move up or down in line with interest rates on the market. When inflation is high, banks' interest rates may rise. As a result, the interest rate on your loan will also increase, and you will pay higher instalments.

What does it mean when the inflation rate has fallen? ›

Inflation measures the change in prices of goods and services in the economy. A drop in inflation means that prices are now rising more slowly. Combined with wage growth, this makes the cost of living more affordable, because you can buy more with the money in your pocket.

Who is better off when you get unexpected inflation? ›

Borrowers benefit from unanticipated inflation because the money they pay back is worth less than the money they borrowed.

Am I losing money because of inflation? ›

Like consumer prices, your savings are directly impacted by changes in inflation. As the cost for most goods and services spike when inflation increases, your savings lose value, even if the amount you have stays unchanged.

Who is impacted most by inflation? ›

Inflation affects consumers most directly, but businesses can also feel the impact: Consumers lose purchasing power when the prices of items they buy, such as food, utilities, and gasoline, increase.

Is inflation bad for banks? ›

Inflation can affect banks in various ways as central banks generally respond with monetary policy tightening and higher interest rates and the economy generally slows in response to these changes.

How is inflation bad for the economy? ›

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Who benefits from inflation? ›

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Who benefits from high interest rates? ›

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

Is it good when inflation falls? ›

The rate of inflation, which is in line with experts' forecast of between 1.9% and 2.1%, has been driven largely by a slowdown in the price rises for food and soft drinks, recreation and culture, and furniture and household goods. The fall in inflation is good news.

What is causing inflation right now? ›

As the labor market tightened during 2021 and 2022, core inflation rose as the ratio of job vacancies to unemployment increased. This ratio is used to measure wage pressures that then pass through to the prices for goods and services.

Does inflation mean my money is worth less? ›

As prices increase, purchasing power (or the value of currency) consequently decreases. And when inflation “surges,” it means that each unit of currency today is worth less than it was just a few months ago. Even if you make zero changes to your lifestyle or everyday purchases, the amount you spend will be higher.

What happens if inflation decreases? ›

So, as inflation drops, prices do not change, but the rate at which prices increase will reduce. “Prices are going to stay permanently fixed at this elevated level and they are not coming back down because that would be called deflation.

What does it mean when inflation is low? ›

High inflation means that prices are increasing quickly, with low inflation meaning that prices are increasing more slowly. Inflation can be contrasted with deflation, which occurs when prices decline and purchasing power increases.

Is a decreasing inflation rate good? ›

However, the reduction in inflation may increase future profits and reduce interest rates - which is good for the market.

What happens when inflation rate is low? ›

When prices are falling, consumers delay making purchases if they can, anticipating lower prices in the future. For the economy this means less economic activity, less income generated by producers, and lower economic growth.


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