Soaring food prices have seen UK inflation ease back far less than expected in April, keeping up the pressure on households and raising the spectre of yet more interest rate rises. The Office for National Statistics said Consumer Prices Index (CPI) inflation fell to its lowest level for more than a year last month, at 8.7 per cent down from 10.1 per cent in March, as energy prices stabilised after sky-high rises a year ago.
But it was higher than forecast by economists, who had pencilled in a drop to 8.2 per cent in April, and more than the Bank of England had predicted just two weeks ago. The figures showed food inflation at 19.3 per cent, down only slightly on March’s eye-watering 19.6 per cent and remaining close to the highest rate for more than 45 years.
Chancellor Jeremy Hunt admitted food prices are “still rising too fast”. He said: “Today’s fall in inflation shows we’re on the right track but there is no room for complacency.”However, he added: “It’s tough right now but things will get better.”
Economists said another rise in interest rates was looking increasingly more-likely after inflation had not fallen as fast as hoped. Rates are at 4.5 per cent because the Bank of England has voted for 12 successive hikes in a row to try and curb the cost crisis and financial markets are pricing in rates to hit nearly 5.5 per cent after the latest inflation shock.
Samuel Tombs at Pantheon Macroeconomics said April’s inflation decrease was “too small a drop for the Monetary Policy Committee (MPC) to stop hiking in June”.
The steep fall in CPI, to its lowest level since last March, reflects last year’s initial sky-high rises in power bills dropping out of the calculation. Last April, the energy price cap leapt up by 54 per cent to £1,971 after Russia’s invasion of Ukraine sent wholesale gas and electricity prices rocketing, but this year the Energy Price Guarantee has been kept at £2,500 since last October.
Ofgem is set to confirm on Thursday that energy prices will fall sharply for households in July, when the current Energy Price Guarantee comes to an end. Consultancy firm Cornwall Insight predicts the price cap will fall by £446 to £2,054 a year, based on falling wholesale energy prices.
What the inflation drop means for household finances
Alice Haine, Personal Finance Analyst at Bestinvest, the DIY investment platform and coaching service, said: “While easing inflation is undoubtedly good news, consumers should not expect any major change in their disposable income just yet - prices are still going up after all.
“In reality, energy prices are actually higher this quarter with the typical bill capped at £2,500 by the temporary Energy Price Guarantee, compared to £1,971 set by Ofgem’s energy price cap in the second quarter of 2022. Another area applying major pressure on household budgets is the cost of grocery shopping, with food and non-alcoholic beverage inflation easing slightly on the year to 19.1 per cent - making it hard for households to pay for the supermarket shop.”
She explained that for household finances, softening inflation, particularly a figure under 10 per cent, is “better news for budgets relentlessly battered by the cost of living crisis over the past 18 months” but added that “consumers would be wise to remember that while inflation is falling, prices are still up by 8.7 per cent compared to a year ago with the only consolation that the pace of those prices rises is slowing compared to previous months”.
For mortgage holders, Alice said a retreating inflation rate may sound like good news as it could ease the affordability crunch for first-time buyers as their disposable incomes could potentially stretch further. However, with the potential that interest rates could peak at 5 per cent this year, this will only “deliver more pain to those taking out a new mortgage or on variable rates”, who are still struggling to absorb the 12 consecutive rate hikes since December 2021.
Alice said: “When you consider the full effect of the rate rises to date have not been fully realised, as some homeowners are protected by five and 10-year fixed-rate products taken out before monetary tightening became the norm, the reality of significantly higher repayments will inevitably take its toll.”
About half of the 7.5million mortgaged households facing revised interest rates between the final quarter of 2021 and the end of 2026 are yet to see a change in their mortgage rate, according to the Resolution Foundation.
Meanwhile, for the 1.3million households set to refinance between April and December of this year, Alice said that monthly repayments will increase by around £200 a month on average - a figure hard to absorb for even the most financially prepared households.
For savers, softening inflation is positive news as it means the value of someone’s savings will be eroded less quickly - though with the headline rate still above the best savings deals, the return will still be negative.
However, with savings rates edging up dramatically over the past year and inflation expected to retreat further, savers can look forward to the moment when their money actually starts to gain in value in real terms.
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