Single-digit inflation returns – but road to normality is an uncertain one

While Britain appears to be past the worst phase of the biggest spike in inflation in generations, the road back to normal is long and winding, says Myron Jobson.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Inflation is nowhere near where it needs to be, but the sharp fall and return to single-digit inflation is a positive development.

“Food non-alcoholic beverage prices remain near a 45-year high, and the marginal fall in annual inflation in this category, down 0.1% to 19.1%, offers limited comfort to households. Increases in the cost of second-hand cars and cigarettes kept inflation elevated in April.

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“But dips in energy and fuels prices helped pave the way for the slowest pick-up in prices since last August. These price declines should give us some real breathing room in the near future to absorb stubborn and sticky inflation in other key areas of expenditure, such as food, which could persist for a little while longer before coming down.

“The fall in headline inflation is somewhat of a false dawn as core CPI, which excludes energy, food, alcohol and tobacco, rose by 6.8% in the 12 months to April 2023, up from 6.2% in March - the highest rate since March 1992.

“The sharp slowdown in the headline figure may not continue, since a large chunk of that decline is attributable to a significant drop in fuel prices which might not be sustained. The cartel of oil-producing countries, OPEC, announced cuts to its production last month to try to raise prices.

“It has been a tough couple of years for households, during which inflation has accelerated to levels not seen since the 1970s. We calculate that the UK lost £153 billion 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. While Britain appears to be past the worst phase of the biggest spike in inflation in generations, the road back to normal is a long, winding and uncertain one. As such, many of us will remain in budgeting mode as heightened costs continue to weigh on household budgets.

“With inflation retaining concerning staying power, the Bank of England will now have to assess whether the interest rate hiking cycle, which has seen rates rise at breakneck speed to 4.5% from near zero as recently as March 2020, has had the intended effect or whether it needs to [do] more to ensure that price increases will come fully under control.”

*The figures were calculated by applying inflation to the latest ONS household spending data, to March 2021. interactive investor then projected household spending over the past two years using Consumer Price Index (including owner occupiers housing costs) over a two-year period to calculate how much household spending has risen with inflation to the end of March 2023.