Shop inflation below 2pc in boost for rate cut hopes

Bank of England’s target is in sight as energy prices also begin to fall for households and businesses

SHOP inflation has fallen below 2pc for the first time since the Bank of England began raising borrowing costs, in a boost for hopes of an imminent rate cut.

Prices in shops rose by 1.3pc on average in March compared with a year earlier, according to the British Retail Consortium (BRC).

It marked the weakest annual growth since the Bank started raising interest rates in December 2021.

Inflation in shops decelerated sharply from 2.5pc in February, with the prices of goods in fact getting cheaper monthon-month. Food prices dropped 0.3pc between February and March, while non-food items were 0.4pc cheaper.

The latest figures will fuel hopes that interest rate cuts are imminent. The energy price cap, enforced by the regulator Ofgem, will fall by about 12pc this month in a move that forecasters believe may help push inflation below the Bank of England’s 2pc target.

Traders expect the first cut in June, with several more expected over the next 12 months to take the base rate to 4.25pc. Andrew Bailey, the Bank’s Governor, said last week that interest rate cuts were “on the way” following encouraging signs that inflation was easing, but he added that more evidence was needed.

Shop price inflation is one of several measures the Bank looks at when gauging overall inflation. Other indicators include housing costs, service prices, wages and energy costs.

The price of everything from dairy products to electronics fell in the shops last month, the BRC said. Helen Dickinson, chief executive of the BRC, said: “While Easter treats were more expensive than in previous years due to high global cocoa and sugar prices, retailers provided cracking deals on popular chocolates, which led to price falls compared to the previous month.

“Dairy prices also fell on the month as farmgate prices eased, and retailers worked hard to lower prices for many essentials. In non-food, prices of electricals, clothing and footwear fell as retailers increased promotions to entice consumer spending.”

The BRC’S figures add to the growing body of evidence suggesting that the worst of the price shock is behind us. Official numbers show food price inflation peaked at almost 20pc last year, marking the steepest rise since at least the late 1980s.

Officials at the Bank of England increased the base rate from the pandemic-era low of 0.1pc to a peak of 5.25pc reached in August. In recent months, members of its Monetary Policy Committee have begun debating the next step. In March, one member, Swati Dhingra, voted to cut rates to 5pc while the other eight, including Mr Bailey, chose to keep rates on hold.

While the Governor has talked up the possibility of rates coming down soon, Catherine Mann, one of the most hawkish members of the MPC, warned

‘While Easter treats were more expensive, retailers provided cracking deals on popular chocolates’

businesses and families last week not to expect rapid action. She said markets were “pricing in too many cuts”, telling Bloomberg TV: “Perhaps markets are a bit too complacent about how long they think overall the Monetary Policy Committee will hold rates.”

Jonathan Haskel, another hawk, said rate cuts should be “a long way off ” in an interview with the Financial Times.

Ms Dickinson said there were still threats that could push up inflation on the shopfloor.

“From this month, retailers face significant increased cost pressures that could put progress on bringing down inflation at risk,” she said.

“These costs include a 6.7pc business rates rise, ill-thought-out recycling proposals and new border checks – all at the same time as the largest rise to the National Living Wage on record.”

The Bank is particularly concerned about the pace of wage increases, which feed into businesses’ costs and also give households more cash to spend. This in turn can drive prices higher.