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Inflation set to fall close to Bank of England’s 2% target, experts predict

21 May 2024 3 minute read
Lower gas and electricity prices compared with the prior year are expected to be the key driver behind price rises cooling.  Photo Owen Humphreys/PA Wire

UK inflation is predicted to fall close to the Bank of England’s 2% target for the first time in nearly three years, raising hopes that interest rate cuts are around the corner.

The latest Consumer Prices Index (CPI) inflation data for April will be published by the Office for National Statistics on Wednesday.

Inflation has been steadily falling in recent months, easing conditions for households and businesses who faced rapidly rising prices during the cost-of-living crisis.

CPI inflation is expected to fall to 2.1% in April from 3.2% in March, according to a consensus compiled by Pantheon Macroeconomics.

July 2021

This would mark the lowest level since July 2021 when inflation was recorded at 2% – the Bank of England’s target level.

Lower gas and electricity prices compared with the prior year are expected to be the key driver behind price rises cooling last month.

But the level of services inflation in the latest official data release will be watched closely by those monitoring the Bank of England’s next move, experts said.

Pantheon said it expects services inflation to fall to 5.4% in April from 6% in March.

Experts said April’s data could be “make or break” for the Bank, which has been waiting for firm evidence that CPI has reached its target level before it can cut interest rates.

Borrowing costs

UK borrowing costs are currently at a 16-year high of 5.25%, and the Bank’s Monetary Policy Committee is next due to meet in June.

James Smith, a developed markets economist for ING, said: “It’s no exaggeration to say that this week’s UK inflation data will make or break a June rate cut from the Bank of England.

“The result is that headline inflation will, we think, dip below the Bank of England’s 2% target in May’s data due in June and stay there for most – if not all – of this year.

“But in the very short term, there’s still some uncertainty over services inflation.

“That’s ultimately what the Bank is most interested in, and it seems to have assumed even greater prominence in the monetary policy decision-making process given recent volatility in the wage figures.”

Luke Bartholomew, senior economist for Abrdn, agreed that services inflation will likely be more important for policymakers than the overall CPI figure.

“While returning inflation to target is psychologically significant, and symbolic of how much progress has occurred since inflation peaked above 11%, it is unlikely to be the number watched most closely by the Bank of England and investors,” he said.

“If services inflation comes in line with expectations, this will keep a June rate cut in play.

“But a large upside surprise will likely see the market scale back its bets on a June cut, and start to look to August for the beginning of the easing cycle.”

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Valerie Matthews
Valerie Matthews
26 days ago

Perhaps some of these ‘Experts’ need to talk to ordinary families like mine. Maybe they can explain to me how when my food bill continues its upward trajectory, as does my Utility bills, my water Bill, my Council Tax Bill and the fuel I put in my vehicle. Exactly HOW is ‘inflation down??

26 days ago

Valerie, I agree. It’s as though those inflation indicies are just made up and bear no relevance to our real world experiences. Is anyone doing an analysis of how this fudged number is put together ?

26 days ago

Oh that’s so comforting. We’ll now have Sunak and his crew of tosspots telling us that all is well, we’re back to normal. Except there’s the little matter of the last 2or more years of corrosive inflation has gouged out a big piece from most people’s spending power, and that’s not spending on posh cars or designer suits but spending on food , utilities and other “basics”. Thanks for nothing you wanchors.

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