Inflation almost down to target after record energy price drop
The ONS has released inflation figures for April: Consumer price inflation, UK: April 2024 – Office for National Statistics
Susannah Streeter, head of money and markets, Hargreaves Lansdown: “The hot mess of inflation has cooled, but it’s not quite at the perfect temperature, which means an immediate interest rate cut looks set to remain elusive. This has been reflected in the pound shooting further above $1.27 as the reading came through.
Reaching this lower level has been a long time coming. The last time inflation was closer to 2% was in July 2021, when Covid restrictions were easing off, nightclubs were reopening and socialising was no longer limited. Football fans were out in force for the Euros and ‘Three Lions’ was back at the top of the charts. Demand was unleashed, helping push up prices, and inflation soared to 5.3% by the end of the year.
But it was the outbreak of the war in Ukraine which sent commodity prices sky high and unleashed the worst of the cost-of-living crisis, with inflation careering upwards to above 11% in October 2022.
As interest rates have shot up, putting a vice-like grip on household budgets, demand has been squeezed out of the economy, but external inflationary pressures like energy costs have also eased off. Even though inflation coming close to target is clearly highly welcome, it doesn’t automatically mean inflation has been relegated from the league of threats. Bank of England policymakers won’t be pulling on winning jerseys just yet. They will want to see more signs that hot wage inflation is also cooling off, before they blow the whistle on this restrictive period of play.
It looks increasingly likely that a rate cut may still not come until August. Even so, it’s more stable ground for investors in the UK. As inflation falls back, they are enjoying the double benefit of recovering capital values and dividend yields above the rate of rising prices, with a typical UK All Share tracker yielding 3.5%.’’
Sarah Coles, head of personal finance, Hargreaves Lansdown: “Energy prices powered the fans cooling inflation this month, after the energy price cap was slashed an impressive 12% at the start of the month. The drop from a year earlier is even more striking, because for the average household, prices are down £238 in a year to £1,690. It’s still a huge increase on the levels we saw before the invasion of Ukraine – when the cheapest deals cost around half this amount – but it’s a real shot in the arm for anyone trying to make ends meet.
It’s worth noting that we’re expecting another cut in July – to around £1,574. However, this is actually going to help push inflation higher, because we’ll be comparing it to a year earlier, when the price cap was £2,074. So this summer we can look forward to the odd combination of falling energy prices actually pushing inflation up.
Food prices continued to feed lower inflation – with prices up just 2.9% in a year – down from 4% a month earlier, and from a high of 19.2% in March 2023. It’s the lowest this rate has been since November 2021, and is the result of food inflation easing for 13 consecutive months.
The typical trolley will contain a mixture of price movements. Milk, butter, poultry and fish are actually cheaper than they were a year earlier – thanks to falling fertiliser prices and tougher negotiations from supermarkets on own brand items. Meanwhile, olive oil is up 41.7%, cocoa up 19.6% and crisps up 7.7% – thanks to a combination of disappointing harvests and solid demand.
Second hand cars also helped depress inflation. Prices actually increased 0.5% in a month, but were down an impressive 10% in a year – compared to a fall of 8.1% in March. Demand has been unwinding for the past nine months. It seems that the vast majority of those who decided they needed a second hand car already have one on the drive by now.
On the flip side, petrol prices were on the rise again – putting upwards pressure on inflation. The average petrol price was up 3.3p per litre in a month to 148.1p per litre. Diesel was up 3p to 157.1p per litre. Overall, petrol prices were still 0.3% lower than a year earlier, but the annual gap has been narrowing.
It feels like this should be a healthy dose of good news, but anyone with a mortgage will be sickened to hear it’s not as good as it seems. For anyone on a variable rate mortgage, nothing will change until we get rate cuts, and the timing of those still hangs in the balance. We can’t completely rule out a June rate cut, but it looks distinctly like there are still a few months before your mortgage bills drop.
For those who need to remortgage in the near future, there’s no respite either. Fixed mortgage rates had been moving in the wrong direction for months. Moneyfacts figures show the average two-year fixed rate rose from 5.56% at the end of January to 5.93%. There is still hope that lower inflation will inspire some to price in an earlier cut, but we may not see any significant change in the market for a while.
In the interim, higher mortgage rates have taken their toll. The HL Savings & Resilience Barometer shows that the average household with a mortgage spends £16,943 on essential housing costs, almost two thirds more then those who own outright and over a third more than those who rent, so it’s no surprise so many are holding their breath for cheaper mortgage deals.”
Mark Hicks, head of Active Savings, Hargreaves Lansdown: “The good news is that staying ahead of inflation with your savings is getting even easier. There are now vast swathes of the savings markets which beat 2.3%. The bad news is that the best deals are highly unlikely to last.
Rates have been dropping across the board, with a number of key players slashing easy access rates in the past week, as they gear up for a summer rate cut. As far as the banks are concerned, they’re attracting enough cash at these rates, so they don’t need to be more generous. It means the writing is on the wall for the 5% easy access rate.
Fixed savings rates are being cut too, but there are still some great deals around in this corner of the savings market, including some over 5%. If you don’t need the money for a fixed period, it makes excellent sense to consider fixing now, so you can lock in this better rate regardless of potential Bank of England cuts in the summer. On the Active Savings cash savings platform, May has seen savers shift into fixed rates in bigger numbers, keen to take advantage while these deals remain.”
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “After years of wrangling it looks like the inflation beast has finally been tamed, as it slides ever closer to its 2% target. It is expected to tick up a bit later on in the year, but the days of double-digit price rises look consigned to history for now.
With speculation mounting on when the Bank of England will cut interest rates, people in the market for an annuity will be wondering if now is the time to make a leap in securing their guaranteed income. After a rollercoaster few years, annuity incomes have settled down – a 65-year-old with a £100,000 pension can get up to £7,117 a year from a single life level annuity, according to data from HL’s annuity search engine.
This is light years away from the paltry £4,888 they would have got three years ago. With an interest rate cut likely in the coming months we could see annuity incomes start to fall back prompting people to take the plunge.
Today’s inflation news is also likely to make the decision between whether to go for a level or escalating annuity or not a bit easier. Inflation-linked annuities have a much lower starting income than their level counterparts. According to HL’s annuity search engine, an RPI linked product would deliver up to £4,494 per year for a 65-year-old with a £100,000 pension. This is more than £2,500 per year less than a level product. When inflation ran rampant, the decision was not so clear-cut, as people had to consider how best to meet soaring costs. However, with the landscape looking more benign, more people will be tempted to opt for the level option. However, they should still consider how they can best inflation proof their income during retirement.”
