Money latest: Interest rate cut chances fall away as inflation drops less than expected (2024)

Inflation has fallen sharply in the UK - so how does it compare to other countries?

The headline rate is now lower than the US, France, Germany and the Eurozone - but only slightly.

Unlike the other comparable countries, Germany saw its inflation figure rise in April to 2.4%, up from 2.3% in March.

Inflation has dropped to its lowest level since July 2021 - and there have been many contributing factors.

According to the Office for National Statistics, housing and household services, particularly gas and electricity, were the biggest downward contributor.

Alcohol and tobacco, food and non-alcoholic beverages, recreation and culture, and communication, also had a big impact - with price rises slowing.

However, there were some upward contributions as well, which stopped inflation edging even closing to the Bank of England's 2% target.

These came from restaurants and hotels, and miscellaneous goods and services.

Inflation falling doesn't mean prices are going down - just that they're rising less quickly.

Markets had judged it pretty much 50/50 on whether the base rate would be cut in June - but those expectations have now fallen back.

Markets are pricing in an 84% chance of no change in the Bank of England's 20 June meeting.

An August cut is now seen as more likely.

The base rate stands at 5.25% - its highest level for 16 years.

The Bank has indicated it will only start cutting when it is clear inflation has reached, and can stay around, the target 2% figure.

Rates are kept high in order to tame inflation by squeezing the economy.

Ourdata and economics editor Ed Conway has been analysing the latest inflation data released by the Office for National Statistics.

He says while the 2.3% figure is down "sharply" from 3.2% in March, it's not as low as economists predicted.

Some had thought it might come down to 2%, while the Bank of England had expected it to land at 2.1%.

Conway says it's good news the figure is lower than it has been since July 2021, but 2.3% might not be enough to prompt a June base rate cut.

"There have been a lot of people out there thinking that maybe they are going to cut interest rates down from 5.25% as soon as next month," he explains.

"This figure to me suggests they may hold on for a little bit longer, maybe they'll wait until August."

He says the government will want to present the inflation figure as evidence the UK is going back to a "period of normality", but the key question is "do people feel better off now?"

He says people are still paying around 20% more than they were a couple of years ago.

Rishi Sunak says inflation is now back to normal - hailing it as a major moment for the economy.

"Today marks a major moment for the economy, with inflation back to normal," said the PM.

"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."

See our 7.06 post for Ian King's explanation of why the government's "plan" is arguably not the reason for the inflation drop.

And shadow chancellor Rachel Reeves says these figures are not the time for ministers to be "taking a victory lap".

She said: "Inflation has fallen, but now is 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. Prices in the shops have soared, mortgage bills have risen and taxes are at a 70-year high. Rishi Sunak is now putting family finances at risk again with his £46bn unfunded policy to abolish national insurance that will mean higher borrowing, higher taxes or the end of the state pension as we know it.

"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."

Commenting on today's inflation data for April, ONS chief economist Grant Fitzner said: "There was another large fall in annual inflation led by lower electricity and gas prices, due to the reduction in the Ofgem energy price cap.

"Tobacco prices also helped pull down the rate, with no duty changes announced in the budget.

"Meanwhile, food price inflation saw further falls over the year. These falls were partially offset by a small uptick in petrol prices.

"The prices of goods leaving factories have risen a little over the last year. Meanwhile, the prices of raw materials and fuels grew in the last month, though they remain below where they were a year ago."

Core inflation - which strips out volatile elements and is seen as a better measure of the economy - also fell in April, but less than expected.

This is a key figure the Bank of England looks at when setting interest rates.

It came in at 3.9% - down from 4.2% in March.

However, it was expected to fall to 3.6%.

Core inflation doesn't include measures such as food and energy price rises.

From its 40-year high of 11.1% in October 2022, the headline rate of inflation – the consumer prices index (CPI) – is back within touching distance of 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 £45billion 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 8% 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 January and March, the latest period for which figures are available, was up 6.3% 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 0.8% in April - 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.

To use a real life example from the Office for National Statistics, meat prices fell by 0.5% between February and March this year, compared with a rise of 1.4% between those months last year. That resulted in an annual rate of inflation in meat prices of 3.1% in the year to March 2024, which was the lowest rate since November 2021.

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.

That can be seen with today's figures: the cut in the household energy price cap introduced by Ofgem in April this year was a major contributor to lower 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.

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.

By Sarah Taaffe-Maguire, business reporter

The rate of inflation dropped to 2.3% in April - down from 3.2% in March.

It hasn't been this low since July 2021, the Office for National Statistics (ONS) said.

A drop to 2.1% had been expected by the Bank of England - but it still shows the fight against price rises is being won.

A fall in the energy price cap at the start of April is a key reason for the drop - energy prices have been a driver of the huge price rises seen in the last two years.

The rate of food price hikes has also slowed, though petrol prices spiked during the month amid Israel-Iran tensions.

The headline CPI figure is now just above the 2% target set by the Bank of England and central banks across the world, and will likely encourage the rate-setters to lower interest rates and make borrowing cheaper as a result.

Rates are kept high in order to tame inflation by squeezing the economy.

The next Bank of England decision is on 20 June.

As well as the headline CPI figure, the Bank will be looking at core inflation - which strips out volatile elements such as energy and food - and wage growth.

The respected research firm Pantheon Macroeconomics said: "Markets are pricing a 60% chance of a rate cut in June and more than fully pricing one by August, so the key question is not whether the MPC will ease soon but how quickly it will cut again after the first reduction.

"We expect one cut per quarter to a 3.5% terminal rate, but with risks skewed to the BoE pausing temporarily at 4.0% to 4.5%."

Basically, inflation is the rate at which prices are rising.

It directly affects our overall cost of living and, if wages are not increasing at the same pace, the value of your money decreases.

It is impacted by lots of different factors including global conflicts - with the Ukraine war having a huge impact on food and gas prices in recent years. Some argue Brexit also had a negative impact.

In the UK, inflation is measured monthly - comparing how much prices are going up with the same time a year previous.

The headline inflation figure, which you'll see a lot in the news, measures price rises across a range of products that we need in our daily lives.

The most commonly used inflation index is the Consumer Price Index (this is the update at 7am today) - and the target for many Western governments is 2%.

One thing to note is that falling inflation doesn't mean prices are coming down - just that they're rising less quickly. You'd need a minus figure, or negative inflation, to see prices fall overall.

Why does inflation impact interest rates?

The Bank of England raises interest rates to try to slow spending and encourage saving - when this happens prices/inflation tend to come down.

When inflation falls, interest rates tend to.

Potential winners and losers from high inflation

Overall, a high and volatile rate of inflation is widely considered to be damaging for the economy – but there are some people who could benefit from it.

Workers with wage bargaining power (perhaps those who belong to strong trade unions) can come off better as they can protect their incomes by bidding for higher wages.

Producers could end up benefitting if their prices rise quicker than their costs.

People with stocks or property could also see the value of their assets rise if there is a sustained period of price inflation.

However, retired people on fixed incomes are likely to be worse off as inflation cuts the real value of their pensions and other savings.

The poorest members of the population will also feel the pinch more as costs of borrowing, food and domestic utilities are high.