Inflation Falls to 2.3% in April: Close But No Cigar

Today, official data revealed that the Consumer Prices Index (CPI) rose by 2.3% in the 12 months to April 2024, a notable drop from the 3.2% increase seen in March. This figure, though lower than the previous month, is slightly above the 2.1% predicted by economists. While progress has been made, it’s not quite enough to celebrate just yet.

A Mixed Bag for Borrowers

Despite the welcome drop in inflation, it isn’t significant enough for the Monetary Policy Committee (MPC) to cut rates at their next meeting. Many had hoped for a more dramatic fall that would push the Bank of England (BoE) closer to its 2% target. Another inflation report is due before the next BoE announcement on 20th June, which could be the decisive moment for the MPC. There is still hope that the June data will tip the scales towards a much-needed rate cut.

Optimism Amidst Uncertainty

While the inflation rate is higher than expected, there are still reasons to be positive. Considering that this time last year CPI inflation was 8.7%, the current rate of 2.3% marks significant progress. This substantial decrease suggests that the economy is stabilizing, albeit slowly, and could start easing pressures on households and businesses.

Borrowers might still see some relief on the horizon. The falling inflation rate, even if not as low as hoped, might encourage the BoE to consider rate cuts later this year, which would be beneficial for homeowners struggling with higher mortgage payments.

A Cautious Approach from the Bank of England

Despite the positive trends, the BoE is likely to adopt a cautious approach. The recent inflation data offers substantial evidence for the BoE to consider alleviating borrower strain. However, given that it falls short of forecasts, it dims the immediate prospects of a June base rate cut. The current figure does foster optimism for future cuts, but patience is required as the economy continues to stabilize.

The pressure on the BoE to act is mounting. The IMF’s recent report highlighted the risks of not dropping the base rate, pointing to unemployment, insolvency, and credit balance data as indicators of a desperate need for relief. Everything now points towards a base rate drop, but the exact timing remains uncertain.

The Broader Economic Impact

The slight miss on inflation forecasts is not without consequences. The continued high services inflation, running at 5.9%, and sticky core inflation are particular areas of concern for policymakers. Despite this, the 2.3% rate will improve confidence and borrowers will be more optimistic about future prospects.

As inflation falls, it signals that the economy might be heading towards a more stable phase. This could potentially boost confidence in the housing market and beyond, encouraging more activity and investment.

Conclusion

While the fall in inflation to 2.3% in April is encouraging, it’s a case of “close but no cigar.” Borrowers and the broader economy are still waiting for that crucial rate cut from the BoE. The next set of data will be critical in determining whether the MPC will act in June or if we’ll have to wait a bit longer for the relief so many desperately need. For now, we remain hopeful that this downward trend in inflation will continue, paving the way for better times ahead.