Money blog: Interest rate cut blow as inflation drops less than expected (2024)

Inflation came in at 2.3% in April - but this is a round up of various sectors, some of which saw prices rise or fall at vastly different rates.

A cut to Ofgem's energy price cap and the associated cheaper bills were a leading driver of April's inflation rate fall.

Prices of electricity, gas and other fuels fell by 27.1% in the year to April 2024, the largest fall on record, according to the Office for National Statistics.

While they didn't fall, food and drink price rises slowed for the 13th month in a row to 2.9% in April, from 4% in March. This is the lowest level since November 2021.

However, services inflation, a critical indicator for Bank of England policymakers, dipped slightly from 6% in March to 5.9% in April, coming in ahead of the 5.4% rate that some economists had been predicting.

This was driven by more volatile aspects of the sector, such as hotels and live music.

As we've been discussing, today's inflation data could set back interest rate cuts - with the Bank of England having stated it needs evidence inflation can hit and stay at the 2% target before it acts.

Headline inflation is now within touching distance of the target - but 2.3% wasn't as low as expected and core inflation, which strips out the volatile elements, is still at 3.9%.

Paul Dales, chief UK 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".

Capital Economics had forecasted that rates would fall from 5.25% now to 3% next year, but Mr Dales says this now looks "more challenging".

He said today's data would have been a "blow" for the Bank of England and Rishi Sunak, despite inflation being closer to the 2% target than it has been for three years.

He pointed out that restaurant and hotel inflation rose from 5.8% to 6%, while cultural services inflation (including concerts and cinemas) rose from 5.4% to 8.3%.

"Even though there is still a wages and a CPI release to go before the Bank of England meeting on 20 June, it feels as though a cut then now seems very unlikely," Mr Dales said.

"Our forecast is that lower energy prices and a faster fading of persistence (due to the previous weakness of the economy) will mean inflation falls below 2% in the coming months and perhaps even close to 1% later this year."

"If so, the BoE may eventually end up cutting interest rates from 5.25% now to 3.00% next year."

However, he said he was "more worried" about that forecast now and it might not happen as soon.

As billed by our City editor Mark Kleinman yesterday, the used car business has gone into administration - just three years after listing in New York at a valuation of $8bn.

Cazoo had warned earlier this month it might need to file for administration, and has now appointed restructuring advisers at Teneo to handle the insolvency.

The business was launched in 2018 as an online retailer and supplier of used cars.

More recently it had become an advertising marketplace similar to Auto Trader, prompting 728 job cuts.

It now has about 200 employees.

The business, which invested aggressively in marketing, had struggled to turn a profit and had made losses before tax of £525.5m in 2022.

Teneo said almost 100 car dealers had expressed an interest in trading on its marketing platform and that administrators hoped to conclude a sale in the coming weeks.

We frequently report on unofficial house price data from the likes of Nationwide, Halifax, Zoopla and Rightmove - the official data lags behind a month or two, but we now have it for the year to March.

Average UK house prices increased by 1.8% in that time period, Office for National Statistics (ONS) figures show.

This left the average price at £283,000.

It represented a recovery after house prices fell by 0.2% in the 12 months to February.

Meanwhile, private rents increased by 8.9% in the 12 months to April.

ONS chief economist Grant Fitzner said: "Average UK house prices grew over the year for the first time since last summer.

"House prices saw an annual rise in every nation and region, except London and the South East, with Scotland seeing the fastest annual growth.

"After two years of unprecedented and generally accelerating annual growth, private rental price rises showed tentative signs of easing.

"Most nations and English regions saw a slowdown, with a notable easing in London."

By Sarah Taaffe-Maguire, business reporter

The London Stock market has not reacted well to a higher than expected inflation figure - 2.3%, rather than the 2.1% forecast. The FTSE 100 (Financial Times Stock Exchange index of most valuable companies on the exchange) fell 0.56% after the announcement.

There have been rises since that opening drop as morning trading wears on but not to the level of the close yesterday evening.

Leading the rally is Marks & Spencer with a sharp 8.77% share price after an already strong 18 months for the high street store. Today it reported a whopping annual profit rise of 58%.

The pound was up at a month high against the dollar this morning and now buys $1.2727. It was the same with sterling against euro as £1 buys €1.1732.

Let's start with the good news. After nearly three years in which inflation was well above the Bank of England's 2% target, it is finally back into what might be considered "normal" levels.

Inflation is the rate at which prices are changing over the past year, and that annual rate dropped from 3.2% in March to 2.3% in April. But while it's down into "normal" territory, there are a few reasons for caution.

The first is that actually the annual rate was expected to fall even further: the consensus forecast among economists was for it to drop to 2.1%. The second is that when you peer through the numbers, they look considerably more inflationary than you might have expected.

Core inflation - which is what you get when you strip out volatile items like food and energy, is still rising by 3.9%, which was not just higher than the overall rate, but considerably higher than economists expected. Even more worryingly, as far as economists are concerned, was the fact that services inflation - which measures the changes in prices of everything from haircuts to legal services - barely fell at all, dropping from 6% to 5.9%. Economists had expected that number to be down at 5.4%.

All of which is to say, while the overall fall in the big number is reassuring, there is quite a lot in there which is not. Indeed, in financial markets, where investors are constantly betting on the likelihood of interest rate changes, there was an instant reaction. While, in the minutes before the inflation data was released, investors were putting a 50% probability on the Bank of England cutting interest rates at its next meeting in June, that probability dropped to just 14% after the inflation data.

But there's a deeper reason to be wary of declaring "mission accomplished" on the cost of living crisis today, which is that for most people, the crisis doesn't yet feel over in the slightest.

The thing to remember here is that inflation typically just measures the changes in prices over the past year. And over the past year specifically, prices are indeed up by only 2.3%. In large part that's because energy prices fell over that period.

However, as we all know, while energy prices might have fallen in the past year, they are still way higher than they were a few years ago. The same goes for overall prices. Indeed, look at the difference between price levels today and mid-2021, the beginning of the period of higher-than-normal inflation, and they're up by a whopping 20.5%.

Now, much of that is the consequence of higher energy prices following Russia's invasion of Ukraine. But the point is that we've had a step shift here. It's not as if prices have gone down, and while wages are now rising more rapidly than inflation, they haven't kept pace with prices - meaning we are all worse off.

Still, inflation is now back to normal levels. The Bank of England is still expected to cut interest rates - albeit not as quickly as previously anticipated. And the economy is out of recession. Things are getting better. But we're not quite out of the woods yet.

We're now hearing from Chancellor Jeremy Hunt, who is asked whether government policies have helped keep inflation above the 2% target.

Mr Hunt said his two cuts to National Insurance were not "slightly inflationary", as the Bank of England previously suggested.

He said the Independent Office for Budget Responsibility had said the "impact was not inflationary".

Inflation falling less than expected in April - to 2.3% rather than 2.1% - has set back expectations for a June interest rate cut, with August now looking more likely.

Mr Hunt emphasised the Bank's previous confidence that we're entering a cutting phase.

"The precise timing is obviously something that we will all have to wait for," he told Burley, adding: "[Inflation is] very close to its target level now, it's returned to much more normal levels.

"And the Bank of England who decide these things independently, once they're confident that they have reached their target level and it's going to stay there, they can bring down interest rates.

"That's obviously good news for mortgage holders.

"But I think families will still be feeling quite bruised after the last couple of years, because although the inflation rate has gone down, prices are still higher than they were a year ago."

Mr Hunt also pointed to remarks by the International Monetary Fund yesterday, which said the UK's economy is due to grow faster than the likes of France in the next six years.

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.