Let’s start with the good news.
After nearly three years in which inflation was well above the Bank of England’s 2% target, it is finally back into what might be considered “normal” levels.
Money latest: Interest rate cut blow as inflation drops less than expected
Inflation is the rate at which prices are changing over the past year, and that annual rate dropped from 3.2% in March to 2.3% in April. But while it’s down into “normal” territory, there are a few reasons for caution.
Reasons for caution
The first is that actually the annual rate was expected to fall even further: the consensus forecast among economists was for it to drop to 2.1%. The second is that when you peer through the numbers, they look considerably more inflationary than you might have expected.
Core inflation – which is what you get when you strip out volatile items like food and energy, is still rising by 3.9%, which was not just higher than the overall rate, but considerably higher than economists expected.
Even more worryingly, as far as economists are concerned, was the fact that services inflation – which measures the changes in prices of everything from haircuts to legal services – barely fell at all, dropping from 6% to 5.9%.
Economists had expected that number to be down at 5.4%.
All of which is to say, while the overall fall in the big number is reassuring, there is quite a lot in there which is not.
An instant interest rate reaction
Indeed, in financial markets, where investors are constantly betting on the likelihood of interest rate changes, there was an instant reaction.
While, in the minutes before the inflation data was released, investors were putting a 50% probability of the Bank of England cutting interest rates at its next meeting in June, that probability dropped to just 14% after the inflation data.
But there’s a deeper reason to be wary of declaring “mission accomplished” on the cost of living crisis today, which is that for most people, the crisis doesn’t yet feel over in the slightest.
A crisis that’s not over
The thing to remember here is that inflation typically just measures the changes in prices over the past year. And over the past year specifically, prices are indeed up by only 2.3%. In large part that’s because energy prices fell over that period.
However, as we all know, while energy prices might have fallen in the past year, they are still way higher than they were a few years ago.
The same goes for overall prices. Indeed, look at the difference between price levels today and mid-2021, the beginning of the period of higher-than-normal inflation, and they’re up by a whopping 20.5%.
Now, much of that is the consequence of higher energy prices following Russia’s invasion of Ukraine. But the point is that we’ve had a step shift here.
It’s not as if prices have gone down, and while wages are now rising more rapidly than inflation, they haven’t kept pace with prices – meaning we are all worse off.
Still: inflation is now back to normal levels. The Bank of England is still expected to cut interest rates – albeit not as quickly as previously anticipated. And the economy is out of recession. Things are getting better. But we’re not quite out of the woods yet.
Content Source: news.sky.com