(qlmbusinessnews.com Thurs. 23rd May, 2024) London, UK —
UK Inflation Drops to Lowest Level in Almost Three Years.
Declining gas and electricity prices have pushed UK inflation to its lowest point in nearly three years.
According to official figures, prices increased by 2.3% in the year to April, down from 3.2% the previous month. While inflation, which measures the rate of price increases over time, has decreased, it remains above the Bank of England's 2% target and slightly higher than anticipated by experts.
Despite this, the Bank has indicated that interest rates, which have been raised in recent years to curb price rises, might be reduced this summer. Currently, rates stand at 5.25%, the highest level in 16 years.
It’s important to note that a fall in inflation does not mean prices are dropping; instead, they are rising at a slower rate.
The significant reduction in energy prices last month, driven by a lower price cap limiting the maximum charge for each unit of energy, was the primary factor behind the inflation drop. Energy prices were 27% lower in April compared to the same month last year, with gas prices alone falling by 38%.
The easing of price increases in tobacco and food also contributed to the inflation decrease, though costs for mobile phone bills and rents continued to rise.
Sarah Coles, head of personal finance at Hargreaves Lansdown, noted that energy prices remain high for the average household. “It’s still a significant increase compared to pre-Ukraine invasion levels when the cheapest deals were about half the current cost, but it’s a relief for those trying to make ends meet,” she said.
Some food items, such as milk, butter, poultry, and fish, were cheaper in April than a year earlier due to falling fertiliser prices and tougher supermarket negotiations on own-brand products. However, Ms Coles pointed out that prices for olive oil, cocoa, and crisps had risen due to poor harvests and high demand.
Prime Minister Rishi Sunak heralded the figures as a “major moment for the economy, with inflation back to normal levels”. He added, “Brighter days are ahead, but only if we stick to the plan to improve economic security and opportunity for everyone.”
Labour's shadow chancellor Rachel Reeves, however, cautioned that now is “not the time for Conservative ministers to be celebrating and taking a victory lap.”
Overall, prices for goods, ranging from food to household appliances, fell by 0.8% in April compared to the same time last year. Nevertheless, services inflation, which measures price rises for services like haircuts or train tickets, remained high at 5.9%.
The main driver behind the high cost of living in recent years has been soaring energy costs, which have placed financial strain on households and businesses. Global gas and oil prices surged following Russia's invasion of Ukraine in February 2022. In the UK, these commodity price hikes pushed inflation to 11% in October 2022, the highest rate in 40 years.
Butcher Gary Wildman, owner of John Wildman & Sons in Rustington, West Sussex, told the BBC that while his business costs had increased, product prices had stabilised. “Prices are probably 10 to 15% higher than they were at the beginning of Covid, but they have definitely levelled off now,” he said. “You can’t pass all the cost onto the customers, or they won’t come in, but because prices are higher, the profit margin remains about the same.”
The Bank of England recently stated that it expects inflation to fall “close” to its target level soon. However, it emphasised the need for “more evidence” before deciding to cut rates, making August or September the most likely timing for a first cut, provided inflation continues to decline as expected.
The interest rate set by the Bank influences the rates set by High Street banks and money lenders. Higher rates result in increased borrowing costs for mortgages and loans, but savers receive better returns.
“It feels like this should be a healthy dose of good news, but anyone with a mortgage will be dismayed to hear it’s not as positive as it seems,” remarked Mr Coles.
Rob Wood, chief UK economist at research consultancy Pantheon Macroeconomics, added that an August interest rate cut “looks much more likely than a June reduction after services inflation barely fell in April”.
Danni Hewson, head of financial analysis at AJ Bell, agreed, noting that “expectations of a June rate cut have been washed away like confetti after a rain-soaked summer wedding”. She said financial markets' expectations of a rate cut next month had “plummeted from 50/50 to just over 10%”.
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