Yahoo Finance UK inflation set to fall back into single digits
Inflation is expected to fall back into single digits for the first time in eight months, in what could be the first boost for UK households since the start of the cost of living crisis.
This Wednesday, official figures are expected to show the overall rate of inflation dropping, raising hopes that the quickest series of interest-rate increases in three decades is coming to an end.
Economists believe inflation will fall to between 8% and 8.5% from the 10.1% reported in March.
Inflation is the increase in the price of something over time. If a bottle of milk costs £1 but £1.05 a year later, then annual milk inflation is 5%.
If inflation falls to between 8% and 8.5% as expected, this could lead to an easing of interest rates for many in mortgage pain after significant rises in recent months.
A two percentage point drop in inflation could mean the Bank of England (BoE) holds interest rates at their current level rather than increasing them, when its next decision is announced on 22 June.
Read more: UK house prices jump to record high of £373,000 in May
In May, the Bank increased interest rates for the 12th time in a row, taking the main rate to 4.5%.
“Combined with this week’s soft labour market data, we think this will create suitable conditions for a BoE pause in June if it can be replicated across the next set of releases as well,” Simon Harvey, head of FX Analysis said.
“Whilst economist predictions for the meeting in June are split, very few see the Bank of England hitting the market implied terminal rate of 5.00%. In our view, a reading in line with current expectations should consequently see market pricing for BoE rate hikes begin to temper.”
The Bank earlier this month said it thinks inflation will dip below its 2% target in a couple of years if rates stay at 4.5%.
Although inflation falling simply means that the rate of price increases slows down, further falls in energy prices are expected later this year, which could drive down inflation further.
Energy regulator Ofgem will announce their price cap, to come into effect from July, this Thursday after the much-watched figure reached £3,500 going into last winter — causing the government to intervene and refund customers £1,000 on average.
However, food prices may take longer than headline consumer prices to decelerate.
Food prices are on an upward spiral and will soon become the biggest cost of living hit to family finances as energy bills fall back.
Read more: Supermarket swaps to cut your own personal rate of inflation
This summer the pressure from rising food bills since 2019-20 (averaging £1,000 per household) will be larger than that for energy (averaging around £900), according to the Resolution Foundation.
More expensive bread, cereals and chocolate all caused the average price of food and non-alcoholic drink to increase 19.2% in the year to March.
Separate figures from Which? show meat, yoghurt and vegetables doubled in price in the year to March.
Sarah Coles, analyst at Hargreaves Lansdown, said: “While we’ve waited a long time for inflation to fall, we may need to wait a while longer for any more significant change [and] April’s drop is unlikely to ease the pressure on our pockets”.
The UK lost £153bn to inflation over a two-year period to March 2023, averaging £5,455 per household, as price rises across key areas of household expenditure robbed Britons of purchasing power, according to Interactive Investor.
Myron Jobson, senior personal finance analyst at the investment platform, said: “This once in a generation type cost of living crisis has robbed us all of purchasing power to the tune of £153bn over the past two years, placing a huge amount of strain on household budgets.
“There has been no escape from rampant inflation because the majority of it is reflected directly in our energy and grocery bills which we are resigned to paying as they form part of essential expenditure for many.”
Watch: How does inflation affect interest rates?
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