Inflation Drops to “Normal” Levels, But Caution Remains
After nearly three years of consistently high inflation rates, there is finally some relief for the Bank of England. The latest data shows that inflation has dropped to 2.3% in April, down from 3.2% in March, bringing it back to the Bank’s 2% target.
However, while this may seem like a positive development, there are still reasons for caution. Firstly, the drop in the annual rate was actually lower than expected, with economists predicting a decrease to 2.1%. Secondly, when examining the numbers more closely, they reveal a more concerning picture. Core inflation, which excludes volatile items such as food and energy, is still rising at a rate of 3.9%, significantly higher than the overall rate and above economists’ expectations.
Furthermore, services inflation, which measures changes in prices for a range of goods and services, has only slightly decreased from 6% to 5.9%, falling short of the expected 5.4%. This discrepancy raises concerns among economists about the true state of inflation and its potential impact on the economy.
The financial market also reacted swiftly to the news, with investors significantly lowering the probability of an interest rate cut at the Bank of England’s next meeting in June. Prior to the release of the data, the likelihood of a rate cut was at 50%, but it dropped to just 14% after the announcement.
However, despite the positive news on inflation, experts warn against declaring “mission accomplished” on the cost of living crisis. This is because the crisis is far from over for most people, as inflation only measures the changes in prices over the past year.
While prices may have increased by only 2.3% in the past year, this is largely due to a decrease in energy prices. However, energy prices are still significantly higher than they were a few years ago, and overall prices have risen by 20.5% since mid-2021. This significant increase is largely attributed to the impact of higher energy prices following Russia’s invasion of Ukraine.
It is clear that there has been a shift in prices, and while wages are now rising faster than inflation, they have not kept up with the rising costs, leaving many people worse off.
In conclusion, while inflation is now back to “normal” levels, there is still a need for caution. The Bank of England is still expected to cut interest rates, albeit at a slower pace than previously anticipated, and the economy is no longer in recession. Things are improving, but the crisis is far from over.
