Interactive Investor

UK inflation falls to Bank’s 2% target

The rate of inflation returning to the Bank of England’s target level is a momentous development and marks a new phase in the cost-of-living crisis.

19th June 2024 07:43

by Myron Jobson from interactive investor

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Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The rate of inflation returning to the Bank of England’s target level is a momentous development in the cost-of-living crisis. It is a psychological milestone that will make many Britons feel good about where prices are heading.

“The fall in inflation is largely attributed to the easing in food price rises, which have reached their lowest rate since October 2021. Crucially, core inflation, which strips out volatile food and fuel prices to give a sense of the underlying trend, also fell to its lowest level since October 2021.

“The return to the target rate of inflation signals a new phase in the Bank of England’s battle against inflation, having raised interest rates to tame the runaway cost of living. The central bank now has the tricky task of attempting to gauge how much inflationary pressure remains and determining how soon it can cut the base rate. Lower interest rates would offer some reprieve to mortgage rates and lower the cost of borrowing more broadly, but the reverse is true when it comes to savings rates.

“This month’s CPI and core inflation readings were supposed to make or break a June interest rate cut, but the persistence of strong wage growth, which is still rising at an average level of about 6%, means the prospects for an interest rate cut appear unlikely.

“Looking ahead, the headline inflation figure is expected to continue to fall in 2024. It is important to remember that CPI inflation is an annual measure, meaning that changes to prices that happened more than a year ago drop out from the annual rate. This is why we have seen significant falls in inflation in recent history, as some past price increases – mainly the painful hikes in energy bills – drop out of annual comparisons. This process is expected to continue to a lesser degree going forward.

“Remember, falling inflation doesn’t mean that prices are falling, but that, on average, they aren’t climbing as quickly.”

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