Cheaper biscuits and bacon help push inflation down
THE rate of inflation fell last month to its lowest level since September 2021 as once galloping supermarket price increases continued to slow.
But the drop in the headline measure of the cost of living — the consumer prices index — was slightly smaller than expected in the City, leading to fears that a June cut in interest rates could be delayed.
The CPI dipped from 3.4 per cent to 3.2 per cent last month, according to the Office for National Statistics, just above economists’ forecast of 3.1 per cent. Food inflation dropped from five per cent to four per cent, the lowest rate since November 2021. The rate has eased for the 12th consecutive month from a peak of 19.2 per cent in March 2023, the highest annual rate seen for nearly half a century. The ONS highlighted falling prices of chocolate biscuits and bacon and sausages as contributors to lower food inflation.
However, services sector inflation — a measure closely watched by the Bank of England — only dropped from 6.1 per cent to six per cent, a smaller drop than the markets were expecting. ONS chief economist Grant Fitzner said: “Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago. Like last month, we saw a partial offset from rising fuel prices.”
Chancellor of the Exchequer Jeremy Hunt said: “The plan is working.”
HOPES of a June interest rate cut from the Bank of England were rapidly fading today after a smaller than expected fall in the rate of inflation “put a spanner in the works”.
The headline measure, the Consumer Prices Index (CPI), dropped from 3.4% to 3.2% in March compared with a consensus forecast of 3.1%. Slower food inflation of 4% was the main reason behind the fall.
Core inflation, which does not include “volatile” components such as food and energy and is closely watched by the Bank’s Monetary Policy Committee (MPC), fell from 4.5% to 4.2%.
However, services sector inflation only dropped from 6.1% to 6%, a smaller dip than the markets had pencilled in.
Another key measure tracked by the MPC, the rate of wage increases, is only slowly coming down. ONS figures this week showed wages still rising at 6%, far higher than the MPC will be comfortable with.
The disappointing “miss” immediately sent financial markets scrambling to reassess their projections of the timing of the first move on rates by the MPC.
A June cut from the current level of 5.25% is now seen as having only a 30% chance of happening, having been as high as 70% just a few weeks ago.
Many economists and investors now
believe that it will be August before the cost of borrowing start to fall, a year after rates were raised to their current level.
Swap rates, which are used to price fixed rate mortgages, have been rising in recent days on fears about the impact of more expensive oil following Iran’s attack on Israel and “sticky” US inflation.
The changing landscape was underlined by an announcement from Coventry Building Society that the cost of all of its fixed rate deals will go up later this week.
Brokers and advisers fear that other major lenders will follow suit in the coming days.
Amit Patel, an adviser at Trinity Finance, said: “Swap rates have been volatile over the past few days so lenders are monitoring their loan books to ensure they are making sufficient margins, whilst at the same time maintaining service levels by not being the cheapest lender in the market.
“I anticipate other lenders will announce modest rate increases over the coming days, perhaps to do with the lower than expected falling inflation.”
Gabriella Willis, UK economist at Santander CIB, said: “Despite key inflation metrics easing in March, the pace of disinflation was softer than the BoE had hoped (and expected).
“This, hot on the heels of stickier than expected UK pay growth, is yet another reason the BoE cannot say with confidence that it is ‘home and dry’, especially with April being a critical point for UK inflation, with the near 10% National Living Wage rise and many firms already having announced, and some implemented, their living wagelinked pay increases.”
Matthew Ryan, Head of Market Strategy at financial services firm Ebury said: “We still see a realistic possibility of looser policy in the summer, although today’s data has somewhat put a spanner in the works.
“The upcoming inflation report for April will be highly important in determining the timing of the first UK rate cut, with plenty of disinflation on the way now that the government’s household energy price cap has been lowered.”