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UK inflation falls below expectations to 2.3%

The UK inflation rate dropped to 2.3% in April, marking its lowest point in nearly three years.

However, the decrease was not as significant as anticipated, dampening expectations for a potential interest rate cut shortly.

According to predictions from city analysts, the expected rise in the cost of goods and services for the year was projected to drop to 2.1%, which is in line with the Bank of England's target of 2%.

Market analysts adjusted their predictions regarding the possibility of the Bank cutting rates from the current 5.25% level. Expectations of a rate reduction as early as next month were tempered, and forecasts of a decrease in August were also revised downward.

According to the latest report, the consumer prices index dropped 2.3% last month, compared to a higher rate of 3.2% in March. This decline can be attributed to the decrease in energy and food expenses. In July 2021, the Office for National Statistics (ONS) recorded a lower inflation rate, marking a significant milestone.

In the past year, electricity and gas prices have significantly dropped by 27%, marking the largest decrease ever recorded. On the other hand, food and soft drink prices experienced a modest annual increase of 2.9%, the lowest rise observed since November 2021.

Highlighting the impact on families' finances and their hesitancy to make expensive purchases, furniture retailers reduced prices by 0.9% from March to April, while the overall cost of goods decreased by 0.8% monthly.

The annual services inflation rate, which primarily represents the expenses that companies bill each other, stood at 5.9%, slightly lower than the 6% recorded in March.

Property rents have surged significantly in the past year, resulting in an inflation measure that incorporates housing costs remaining considerably higher than the headline CPI.

The increase in mortgage costs contributed to the rise of the ONS's alternative consumer prices index, including housing (CPIH), by 3% compared to the previous year.

Last year, inflation remained persistently high, primarily due to a significant increase in the cost of imports.

Inflation avoided a further slowdown last month, thanks to an increase in petrol and diesel prices. According to the ONS, the price of a barrel of Brent crude has remained relatively stable at around $83 (£65) in recent times.

Yael Selfin, the chief economist at KPMG UK, stated that the possibility of an interest rate reduction in the upcoming month has diminished. "The Bank of England's target for inflation is being approached, but it remains uncertain whether this will be sufficient to influence an early rate cut," she stated.

According to Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, the core inflation rate is currently at 3.9%, higher than its historical average. Carbo believes this rate needs to decrease before the central bank's monetary policy committee considers reducing interest rates.

With the recent surge in wage growth data, the high services inflation will continue to pose a potential threat to inflationary pressures in the latter part of the year. Considering the recent decline in the headline rate, the MPC might exercise caution during its meeting and choose to maintain interest rates.

Rishi Sunak described April's rate as a significant economic milestone, as inflation has stabilised. The prime minister expressed confidence in the plan's success, citing it as evidence that the challenging choices made are yielding positive results.

Rachel Reeves, the shadow chancellor, expressed her view that despite the decrease in inflation, it is not an appropriate time for Conservative ministers to celebrate.

 

In a recent post on X, she highlighted the alarming increase in prices, the rising burden of mortgage bills, and the record-breaking high taxes plaguing the economy. Labour is the only party that can be relied upon to safeguard and enhance family finances.

The inflation rate in the 20-member Eurozone remained steady at 2.4% in April, matching the previous month's figure.

New data from the Office for National Statistics (ONS) revealed a higher-than-anticipated increase in public finances during April.

 

The UK's government debt financing costs drove the monthly deficit to £20.5 billion. It marks the fourth highest April borrowing since monthly records began in 1993, surpassing official forecasts by £1.9 billion.

The debt payments decreased by £1.7 billion to £8.6 billion, although it remained higher than the Office for Budget Responsibility (OBR) anticipated.

According to analysts, the latest figures indicate that the government's finances are under pressure, leading them to dismiss the possibility of tax cuts by the chancellor before the general election.

Martin Beck, an economic adviser to the EY Item Club, expressed his disappointment with the UK's public finances as the new fiscal year began. He noted that borrowing exceeded the OBR's forecast. 

The unexpected increase in Bank Rate and gilt yields has significantly impacted debt servicing costs, causing the underperformance to persist throughout the remainder of the financial year.

According to experts, it seems highly improbable that any revisions in the OBR forecast would provide the government with an opportunity for another fiscal event involving tax cuts before the upcoming general election.