Inflation fell to 2.3 per cent in the year to April, figures released on Wednesday by the Office for National Statistics (ONS) show, the lowest level in nearly three years.
The Consumer Prices Index (CPI) measure of inflation is down from 3.2 per cent a month ago.
Food inflation edged down to 2.9 per cent in April from 4 per cent in March, while core inflation, which strips out volatile food and fuel prices, fell to 3.9 per cent, down from 4.2 per cent.
Meanwhile, services inflation eased slightly, from 6 per cent to 5.9 per cent.
Falling gas and electricity prices are a major reason for the fall in April’s inflation number after the energy price cap was lowered by Ofgem. Prices of electricity, gas and other fuels fell by 27.1 per cent – the biggest fall since records began in 1989.
Rishi Sunak said inflation is “back to normal” and “brighter days are ahead”, in response to the latest figures.
The Prime Minister said: “Today marks a major moment for the economy. This is proof that the plan is working and that the difficult decisions we have taken are paying off. Brighter days are ahead, but only if we stick to the plan to improve economic security and opportunity for everyone.”
However, many economists had hoped it would fall to the Bank of England’s 2 per cent target, which would be an encouraging sign that interest rates could fall sooner rather than later.
The shadow Chancellor, Rachel Reeves, said now was “not the time for Conservative ministers to be popping champagne corks and taking a victory lap”.
“After 14 years of Conservative chaos families are worse off. It’s time for change. Labour’s first steps will deliver economic stability so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”
What is predicted to happen to inflation in 2024?
Despite the fall, it has still not reached the Bank’s target. However, there is one more reading in June before the next interest rate decision. Inflation is expected to fall further later this year, although many experts have warned it will then rebound and go back above the target.
The Bank of England’s Monetary Policy Committee (MPC) warned in a report recently that the inflation figure would increase slightly to around 2.5 per cent in the second half of 2024.
The major reason for this is that inflation is measured based on the growth in prices over the past year, so a large part of the figure is based on what prices were 12 months ago.
This April, the energy price cap – the maximum most households pay for each unit of gas or electricity used – was cut by the regulator Ofgem.
By comparison, in April 2023, the amount people were paying for their energy was at the highest level on record.
Energy prices started to fall in the second half of 2023, and experts are not currently expecting more dramatic cuts. This means that once we reach the second half of 2024, the annual price fall in energy will not be as dramatic as it is in current figures, which means it won’t have as big a downwards drag on the overall inflation figure as it’s currently having.
Sanjay Raja of Deutsche Bank said: “Looking ahead, we continue to see CPI hovering around 2 per cent year-on-year in the second quarter of 2024, before tracking around 2 to 2.5 per cent year-on-year in the second half of 2024.”
What does this mean for interest rates?
The Bank of England tends to cut interest rates as inflation comes down. At its next meeting in June, some experts predict that the Bank will hold rates at 5.25 per cent while others think it could finally cut them.
However, there has been more positive forecasts recently with the Bank’s deputy governor suggesting rates could be cut as soon as this summer if inflation continues to come down.
Ben Broadbent said a cut in the cost of borrowing is “possible” if the economy develops as expected. “If things continue to evolve with its forecasts – forecasts that suggest policy will have to become less restrictive at some point – then it’s [the] possible bank rate could be cut some time over the summer,” he said.
But others have said today’s figure would actually reduce the chance of an earlier cut. Paul Dales, economist at Capital Economics, said: “The smaller-than-expected fall in inflation makes a June rate cut unlikely and casts some doubt over August too.
“Most disappointing was that services inflation only fell from to 5.9 per cent which suggests the persistence in domestic inflation is fading even slower than the Bank had assumed.”
Economists who previously spoke to i said the Bank would take a “conservative approach” to cuts because of concerns about wage growth.
Annual growth in regular earnings – excluding bonuses – was 6 per cent in the period from December 2023 to February 2024, which is nearly double the inflation figure.
But falling inflation will likely increase the likelihood of market expectations of rate cuts.
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’s base rate, which inflation influences.
Tracker products and standard variable mortgages change directly when interest rates change.
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 but will still be welcome news for homeowners.
Nick Mendes of brokers John Charcol said: “Today’s announcement indicates that markets will likely price in a prolonged hold, meaning mortgage rates will remain around their current levels for a bit longer. It’s important to stress that until an official bank rate cut occurs, any declines in fixed rates will be gradual and steady, rather than the rapid weekly decreases seen earlier this year, as swaps have remained settled based on initial market reactions.”
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.
Currently, the best easy-access account is 5.02 per cent with Oxbury Bank – above inflation. The best one-year fixed is with Habib Bank Zurich UK at 5.21 per cent.
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 goes down, the Bank of England is likely to cut interest rates later this year, so today’s good rates may not last indefinitely.
