UK Inflation Falls Again But Still Higher Than Expected

The Office for National Statistics (ONS) has this morning released inflation figures for the UK for March 2024.

Consumer Prices Index (CPI) inflation fell in March from 3.4% pa to 3.2% pa.  This is not as low as many commentators were expecting although we thought inflation may even not move given increased housing and fuel costs both in the UK and the USA.  Perhaps, the impact of increased tensions across the Middle East will have some impact but it looks like oil prices are falling despite the Israel/Iran risk of conflict.

In the USA last week, the Labor Department confirmed that US inflation had actually climbed in March from 3.2% pa in February to 3.5% pa in March dampening hopes of an early interest rate cut.  This also may force the Federal Reserve to increase interest rates and even try and put the US economy into recession.

The UK picture is a little bleaker.  Our economy is still not in full recovery after Brexit and the pandemic when compared to the US.  Earlier this week, the number of people not working increased meaning less money being spent in the economy.  UK Unemployment increased to its highest level in 6 months at 4.2% between December and February and the number of economically inactive people (those choosing not work and retire early) also increased.  This suggests that the UK economy is slowing down and possibly does keep the UK on track to cut interest rates (we suggest the Autumn at the earliest).

With UK CPI at 3.2%, down from 3.4% pa (February), 4.0% pa (January) and more than 50% lower than September 2023 (6.7% pa), suggests that higher interest rates are doing their job.  Never forget thought that falling inflation does not mean falling prices and an ease on the cost of living, it simply means that prices are increasing still but at a lower rate.

The ONS reports that the largest downward contributors to the CPI rate came from food, and restaurants and cafes that had increased in February whilst the largest upward contributions came from housing and household services, health, communications, and motor fuels.

RPI Falls Again But Only Just

The old measure of inflation RPI, an arithmetical mean of the average prices of a basket of household spending (rather than the geometric mean for CPI) and still our preferred measure of real inflation, fell again from 4.5% pa to 4.2% pa.  RPI has fallen consistently over the last few months and is now also more than 50% lower than it was in September 2023.

Comment

No doubt stock markets in the UK will react kindly to lower inflation today as it may allow the Bank of England to cut interest rates sooner rather than later, but we suspect inflation may hold or tick back up for April when the impact of National Living and National Minimum Wage increases hitting employers that then filters through to increased costs passed onto consumers as well as April inflationary increases to our bills mobile telephone, subscription-based TV and streaming services.

We said last month, and we repeat for this month, we are now in an unusual position that you can earn over 5% pa on cash deposit savings, but inflation is lower.  This is a prime opportunity to lock into fixed rate deposit accounts as the £ in your pocket is worth more than it was.

The next Bank of England announcement on UK interest rates is due in 3 weeks on 9^th May and this should make interesting reading.