The rate of price increases slowed by slightly less than economists were expecting.
By Callum Mason April 17, 2024
Inflation slowed to 3.2 per cent in the year to March, figures released on Wednesday by the Office for National Statistics (ONS) show.
The consumer prices index (CPI) measure of inflation is down from 3.4 per cent a month ago, and is at its lowest rate for more than two years.
Inflation – which measures the rate of price increases over 12 months – was widely expected to fall in March, with economists telling i this week they expected the figure to be either 3 or 3.1 per cent. Today’s fall is by slightly less than expected.
Core inflation, which excludes energy, food, alcohol and tobacco, fell to 4.2 per cent from 4.5 per cent.
According to the ONS, the biggest downwards pressure on inflation came from food, with prices rising by less than a year ago, while the largest upward contribution being motor fuels, with prices rising this year but falling a year ago.
Food inflation is sitting at 4 per cent, down from 5 per cent, while services inflation eased slightly from 6.1 per cent to 6 per cent.
Chancellor Jeremy Hunt said: “The plan is working: inflation is falling faster than expected, down from over 11 per cent to 3.2 per cent, the lowest level in nearly two-and-a-half years, helping people’s money go further.
But Labour’s Shadow Chancellor Rachel Reeves said: “Conservative ministers will be hitting the airwaves today to tell the British people that they have never had it so good. However, after 14 years of economic failure under the Conservatives working people are worse off. Prices are still high in the shops, monthly mortgage bills are going up and inflation is still higher than the Bank of England’s target.”
What is predicted to happen to inflation in 2024?
In the Bank of England’s Monetary Policy Report (MPR) in February, it said that it expected inflation to fall “temporarily” below 2 per cent in the second quarter of the year.
It then said that its projection implied that inflation would be around 2.75 per cent at the end 2024.
Other forecasters also expect inflation to fall below 2 per cent in next month’s figures.
Capital Economics has said inflation could fall to 1.7 per cent in April’s figures, which are released next month.
But experts are divided over what will happen to CPI after this. Like the Bank of England, Deutsche Bank Research for example expects that inflation will rise up above 2 per cent and be between 2 and 2.5 per cent for the remainder of the year.
Capital Economics, however, expects inflation to keep falling, and forecasts it reaching as low as 0.5 per cent in 2024.
What does this mean for interest rates?
The Bank of England tends to cut interest rates as inflation comes down, though at its next meeting in May, it’s predicted that the Bank will hold rates at 5.25 per cent.
This is because Andrew Bailey, the Bank’s Governor has warned: “We need to see more evidence that inflation is set to fall all the way to the 2 per cent target, and stay there, before we can lower interest rates.”
At the moment, evidence suggests inflation could rise again after falling below 2 per cent.
Most forecasters therefore don’t expect a cut to rates before June, and some suggest that today’s high services inflation figure could mean cuts come later.
Capital Economics for example has said the chance of a June rate cut is now “slimmer” than before.
What does this mean for mortgages, savings and pensions?
Mortgages
Mortgages are not directly affected by inflation, although many products are affected by the Bank of England’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when the Bank of England base rate changes.
Fixed mortgages tend to work on long-term predictions for where the base rate will go. This means that a big drop in inflation can send mortgage rates down, because it can lead experts to believe the base rate will fall sooner rather than later.
Today’s drop is likely not dramatic enough to trigger a plunge in rates – because it’s a smaller fall than expected.
Savings
High inflation is bad news for savers as it erodes the value of money held in the bank. Therefore, the lower the rate, the better the news for savers.
However, experts believe we are “past the peak” for savings with most fixed rates now dropping below 6 per cent. This means it is worth taking advantage of the best deals now.
Pensions
The drop in inflation will be welcomed by pensioners who have been struggling with the cost of living crisis over the past two years, especially those for whom the state pension makes up a large portion of their income.
They have just received a state pension boost of up to 8.5 per cent under the triple-lock mechanism.
Another factor to be aware of is the impact of inflation on annuity rates.
Annuities offer a guaranteed annual income in retirement. They offer an alternative to drawing down money from a pension pot, which could eventually run out, particularly if a retiree lives longer than expected.
While they have been unpopular in recent years, rising interest rates have improved the annual incomes someone can buy.
But for retirees opting for one, time may be of the essence. As inflation is cooling, the Bank of England is likely to cut interest rates later this year, today’s good rates may not last indefinitely.
Investment Synergy - a period of consolidation and stability for all sectors that inflation affects would be great, however that would be called stagnation and would negatively impact across the board - ever moving chess pieces being played with winners and losers.....
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