The Consumer Price Index (CPI) is the main measure of inflation and it shows how the prices of goods and services have changed over time
Inflation has dropped to 2.3% in the 12 months to April, giving hope that an interest rate cut could be on the horizon.
The latest Consumer Price Index (CPA) figure is down from the 3.2% recorded in March. Inflation has sat above the Bank of England’s target of 2% every month since July 2021, and in December of that year the Bank started to rase its base interest rate in a bid to control it.
The base rate has remained at 5.25% since August last year which has caused misery for millions as mortgages and borrowing costs have skyrocketed. Earlier this month the Bank of England said it would start to cut rates when inflation looked like it was going to stay low, and today’s figure offers some hope for a cut sooner rather than later. The next meeting is set for June 20.
According to the Office of National Statistics (ONS), a fall in the energy price cap at the start of April is a key reason for the drop. The latest data reports that the price of electricity, gas and other fuels fell by 27.1% in the year to April. This is the biggest fall since records began being kept in 1989. Tobacco prices also helped pull down the rate, and this was down to no duty changes announced in the budget.
However, core inflation – which doesn’t include measures such as food and energy price rises – did not fall as much. This sat at 3.9%, down from 4.2% in March. Economists believed this was to drop further to around 3.6%. The Bank of England usually focuses on this figure when it comes to making a decision on what to do with the base rate.
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. 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.”
On the release of the latest figures, Prime Minister Rishi Sunak described inflation as “being back to normal” and that “brighter days are ahead”. He commented: “Today marks a major moment for the economy, with inflation back to normal. 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, Labour Shadow Chancellor Rachel Reeves said even though inflation had fallen, now was not the time for Tory ministers to be “popping champagne corks and taking a victory lap”. She said: “After fourteen years of Conservative chaos families are worse off. Prices in the shops have soared, mortgage bills have risen and taxes are at a seventy year high. Rishi Sunak is now putting family finances at risk again with his £46billion 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.”
What is inflation?
The Consumer Prices Index (CPI) is the main measure of inflation and it shows how the prices of goods and services have changed over time. Inflation data is released by the Office for National Statistics (ONS) each month and measures how the price of goods and services has changed over time. So when inflation is higher, you’re paying more for something compared to one year ago.
Inflation began to rise towards the end of 2021 with factors such as rising energy costs and higher food prices being the main contributors. It reached a peak of 11% in October 2022 and has slowly been dropping since.
Will prices start going down now inflation has fallen?
The most important thing to take away from today is that just because inflation is lower, it does not mean prices have stopped rising. It just means they’re going up at a slightly slower rate than before. For example, if something cost £1 last year and the rate of inflation is 2%, it would cost £1.02 today.
How does inflation affect interest rates?
Rising inflation was the reason why the Bank of England started increasing its base interest rate from the record low of 0.1% in December 2021. In August 2023, the bank hiked its base rate to 5.25% and it has remained at that level ever since. Raising interest rates means borrowing becomes more expensive – this in turn means households have less money to spend, so they should spend less, and this in theory should bring inflation down. When the base rate goes down, borrowing becomes cheaper.
Rising interest rates have also affected mortgages with million facing hikes in their monthly payments since inflation – and the Bank’s base rate – started to rise. With a base rate cut, mortgage rates may start to come down, easing the pain on households coming off ultra-low fixed-rate deals this year.
The Bank of England’s next meeting will be on June 20, and even though the UK’s core interest rate has not fallen as low as anticipated, Brits should not lose hope for a cut to interest rates – although it may be more into July or August.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, said: “With inflation now closer to the Bank of England’s 2% target, all eyes are now pinned on next month’s interest rate decision to see if the central bank will deliver more summer cheer with a rate cut. While the possibility of a summer cut is being floated by members of the rate-setting Monetary Policy Committee, whether it happens in June or August remains to be seen.”
