Prices Down 3.2% In March Thanks To Cheaper Food – Forbes Advisor UK
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17 April: Lower-Than-Expected Fall Cools Rate Cut Hopes
Annual inflation dipped to 3.2% in the year to March 2024, its lowest level in more than two years, down from 3.4% recorded a month earlier, Andrew Michael writes.
Today’s announcement, from the Office for National Statistics (ONS), sees prices fall by less than hoped for by market-watchers, with some saying it could defer a cut in the Bank of England Bank Rate from the summer to the autumn.
But it will be welcomed by both individuals and businesses alike who endured a prolonged period of soaring prices lasting through 2022, when the inflation figure reached double-digit levels and stayed there well into last year.
The monthly reading of the Consumer Prices Index (CPI) from the ONS shows that prices rose by 0.6% last month compared with a rise of 0.8% in March 2023.
According to the ONS, the largest downward contribution to today’s headline figure came from food, with prices rising less than a year ago. Set against this was the rising cost of motor fuel.
Core CPI, which leaves out volatile data covering energy, food, alcohol and tobacco, stood at 4.7% in the year to March, down from 4.8% a month earlier.
CPI including owner-occupier costs (CPIH) stood at 3.8% in the 12 months to March 2024, unchanged from a month earlier. On a monthly basis, CPIH rose by 0.6% in March this year, compared with a rise of 0.7% for the same month in 2023.
Grant Fitzner, ONS chief economist, said: “Inflation eased slightly in March to its lowest annual rate for two and a half years. Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago. Similarly to last month, we saw a partial offset from rising fuel prices.”
The Bank of England, which is required by the government to maintain long-term UK inflation at 2%, has kept borrowing costs at their 15-year high of 5.25% since August 2023.
With inflation still running well above target and yesterday’s wage growth figures coming in hotter than expected, the UK’s central bank will be in no hurry to reduce interest rates, despite a recent suggestion by the Bank’s governor, Andrew Bailey, that cuts this year were “in play”.
Before today’s announcement Mr Bailey also said there was “strong evidence” that inflation was coming down in the UK. The Bank’s next interest rate-setting decision is due on 9 May.
The conundrum of when to reduce interest rates without risking an upwards jolt to inflation is not just a domestic issue.
Both the European Central Bank and US Federal Reserve have been grappling with the same challenge in recent months, each choosing to keep interest rates on hold while stubborn inflationary factors persist.
Over the past year, it appeared that the Fed would be first among the three central banks to bring down borrowing costs. But, in recent months, inflation has persistently remained above 3% in the US, with the annual figure lifting from 3.1% in January to its present level of 3.5%.
Today’s announcement means annual UK inflation is now lower than that of the US for the first time since early 2022. But it is higher than the Eurozone figure of 2.4%, which covers the European economic bloc that uses the euro.
Neil Birrell, chief investment officer at Premier Miton Investors, said: “UK inflation remained a little higher than hoped in March, reflecting the strength of the economy, particularly the consumer sector, which is in pretty good shape.
“Inevitably everyone will be wondering what this means for interest rate cuts. The answer is probably not much, as this is just a case of inflation not slowing as quickly as hoped. However, the data does mean it’s unlikely the Bank of England will move to the front of the starting grid when it comes to who cuts first: the Bank, the Fed, or the European Central Bank.”
11 April: Hopes Rise For Summer Cut To Euro Borrowing Costs
The European Central Bank (ECB) has, as widely expected, left borrowing costs untouched across the Eurozone, while potentially paving the way for interest rate cuts later this summer, Andrew Michael writes.
Today’s announcement means the central bank’s main refinancing rate remains at a record high of 4.5%, where it has stood since last October. The ECB’s marginal lending facility stays at 4.75%, while the deposit rate continues at a level of 4%.
Explaining its decision, the ECB said: “Most measures of underlying inflation are easing, wage growth is gradually moderating, and firms are absorbing part of the rise in labour costs in their profits”.
It added, however, that “domestic price pressures are strong and are keeping services’ price inflation high”.
Market watchers responded by suggesting that the tone of today’s statement could potentially result in an easing of borrowing costs across the Eurozone this summer.
Consumer prices in the 20 countries that share the euro rose by 2.4% in the year to March 2024. After a prolonged bout of interest rate rises by the ECB last year, Eurozone inflation now looks likelier to reach its long-term target of 2% more quickly than in the US, where buoyant economic data has kept inflation levels stubbornly elevated above 3% for months.
By way of contrast, annual UK inflation stood at 3.4% in the year to March 2024, with the next official figures due to be published next week. Borrowing costs remain at 5.25% where they have been since August 2023.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The European Central Bank has predictably opted to hold rates once more. Inflation appears to be better behaved and less sticky in the Eurozone than it has been elsewhere, particularly when compared to the US where just yesterday we saw another unwanted uptick which took headline inflation to 3.5%.
“Given the Federal Reserve is now expected to resist making any cuts for some time yet, and the Bank of England faces a difficult balancing act, the ECB could well be the first to make a move.”
Michael Field, European market strategist at Morningstar, said: “After recent comments from the Federal Reserve about potentially putting the brakes on US rate cuts for the time being, all eyes were on the ECB’s statement to ascertain whether the Fed’s reservations would have any impact on future interest rate decisions in the Eurozone.
“Thankfully, for European investors, it seems the ECB is happy to go it alone. The language in the statement is sufficiently vague but does not indicate that the ECB is backing away from cutting rates as soon as June.”
Felix Feather, economist at abrdn, said: “As expected, the ECB laid the groundwork for an imminent easing cycle by adjusting its monetary policy statement. The framing of today’s decision confirms that, barring any major economic surprises, the bank is on track to deliver a cut at its next meeting in June.
“Despite embracing the idea of cuts, the officials also stressed the need to keep policy restrictive some time, which would preclude a very sharp series of cuts. Nonetheless, we expect the bank to deliver several 25-basis point [quarter of a percentage point] cuts before the end of the year.”
10 April: Fed May Hold Off Until Summer Or Autumn
Headline US inflation rose by 3.5% in the year to March, up from 3.2% in the year to February, writes Andrew Michael.
Analysts say the increase provides the Federal Reserve with extra reason to hold off cutting borrowing costs from their present 22-year high until summer at the earliest. Indeed, buoyant economic data such as stronger-than-expected employment figures last week has raised the possibility that lingering inflation will possibly deter the Fed from reducing borrowing costs at all this year.
The increase recorded for March itself was 0.4%, the same as February, and 0.1 percentage point higher than January’s 0.3%. According to the US Bureau of Labor Statistics, rising fuel and housing costs accounted for more than half the latest monthly rise.
The core annual rate, which omits volatile food and energy prices, rose by 3.8% in March this year, the same figure as the previous month. The Bureau reported a 0.4 percentage point rise for the core monthly figure in March, the same increase as February.
Having cut interest rates aggressively during 2023, it appeared the Fed was winning the challenge of bringing soaring inflation levels back down to their long-term target levels of 2%.
However, while headline inflation continues to fall elsewhere round the world – the latest UK figure for February is 3.4%, down from 4% In January – US prices have largely flatlined or increased in recent months, keeping them above the 3% level. Euro area annual inflation stands at 2.4% for March 2024, according to the latest official estimate.
Richard Flynn, managing director at Charles Schwab UK, said: “Every piece of economic data is now being placed under the microscope as the market tries to predict when monetary policy will change, but these figures are unlikely to cause a shift.
“In recent months it has become clear that the journey to the Fed’s target of 2% inflation will be bumpy and central bankers are proceeding with caution when it comes to rate changes. It’s often said that the Fed takes the escalator up and the elevator down when setting rates. But for the path downwards in this cycle, it looks like they will opt for the stairs.”Neil Birrell, chief investment officer at Premier Miton Diversified Funds, said: “The US economy is running along at quite a pace and a June rate cut looks less and less likely – July or September is the call now. The Fed has got some head-scratching to do and, if other central banks were waiting for the Fed to move [first], they have got a conundrum on their hands.”
21 March: Rate-Setters Want More Evidence Inflation Is Beaten
The Bank of England has kept the Bank Rate at 5.25%, leaving UK borrowing costs unchanged for the fifth consecutive time since August last year, writes Andrew Michael.
Its Monetary Policy Committee voted by eight votes to one to hold the Bank Rate at its 16-year high, with the one dissenting voice, Swati Dhingra, favouring a rate reduction of a quarter of a percentage point to 5%.
Today’s announcement echoes last night’s decision by the Federal Reserve, the US central bank, which also chose to maintain interest rates at their existing level (see story below).
Along with other central banks, the Bank of England is required to maintain inflation at 2% over the medium to long-term.
In a bid to head off soaring inflation levels that beset the UK economy through 2022 and much of last year, the Bank raised borrowing costs 14 times in a row between December 2021 and August last year, in the most aggressive round of monetary policy tightening since the 1980s.
Despite yesterday’s official figures which recorded a sharp fall in annual inflation to 3.4% in February, from 4% a month earlier, the Bank has continued to tread a cautious path in terms of its monetary policy decisions.
Explaining today’s decision, the Bank said: “Headline consumer price index inflation has continued to fall back relatively sharply in part owing to base effects and external effects from energy and goods prices.
“The restrictive stance of monetary policy is weighing on activity in the real economy, is leading to a looser labour market and is bearing down on inflationary pressures. Nonetheless, key indicators of inflation persistence remain elevated.
“Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term in line with the MPC’s remit.”
The Bank’s announcement means that millions of borrowers on variable rate and tracker mortgages and loans should not experience any direct impact on their repayments. Lenders, however, are at liberty to alter variable rate products should they choose to do so.
New borrowers and customers approaching the end of fixed deals and who need to re-mortgage this year, around one million account holders in total, will be watching closely to see how lenders react to today’s announcement.
In recent days, high street names have adopted different attitudes to pricing their home loan products confirming the importance for customers to shop around when looking for new deals.
For example, earlier this week NatWest chose to reduce selected five year fixed-rate mortgages, while TSB announced an increase to a number of fixed-rate loans.
The latest dip in the inflation figure means that today’s Bank Rate announcement allows savers to receive a ‘real’ return on cash held in bank and building society accounts, provided they seek out the best deals.
A real return is obtained when the interest being paid out from a savings account or bond is greater than the prevailing inflation figure.
According to Moneyfacts Compare, 80% of the UK’s savings accounts pay interest at above-inflation rates.
The MPC’s next rate-setting decision takes place on 9 May 2024.
Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Yesterday, we saw inflation drop to 3.4%, the lowest level seen since September 2021, but the journey to get there has not been plain sailing and there is still some way to go to reach the Bank’s 2% target.
“Wage growth continues to be a significant driver of inflation, particularly in the service sector, and though this is now slowing a little it will no doubt make this target harder to achieve. As such, the Bank has reiterated that it will maintain its data dependent resolve until it is satisfied that inflation has come down far enough and will not see a further spike.”
Nicholas Hyett, investment manager at Wealth Club, said: “The market was already anticipating that rate cuts wouldn’t start until the second half of the year, and there’s little in these numbers to change that perception.
“So what will ultimately trigger a change of course? We suspect that central banks around the world are waiting on the US Federal Reserve to set the pace. Once the Fed starts to cut, currency movements will likely force others to follow suit. As in so many other areas of public life, where the US leads, the UK will follow.”
Shaun Port, managing director of savings at Chase UK, said: “The decision to hold interest rates is welcome news for savers hoping to make the most of inflation beating interest on savings accounts. However, it’s a good idea to shop around as we’re starting to see some cuts to the rates on offer in anticipation of future rate cuts by the Bank of England.”
20 March: Fed Holds Rates Ahead Of Bank Rate Announcement
UK annual inflation fell by more than expected to 3.4% in February this year, its lowest since autumn 2021 and down from the 4% where it had been stalled since last December, writes Andrew Michael.
The announcement will strengthen arguments for the Bank of England to start cutting interest rates, with it having made significant progress in bringing down what has been a sustained period of rising prices.
Today’s Consumer Prices Index, from the Office for National Statistics (ONS), shows that prices rose by 0.6% last month, compared with a rise of 1.1% in February 2023.
Core CPI, which omits volatile data covering energy, food, alcohol and tobacco, stood at 4.8% in the year to February this year, down from 5.1% a month earlier.
CPI including owner-occupier costs (CPIH) rose by 3.8% in the 12 months to February this year, compared with 4.2% in January. On a monthly basis, CPIH rose by 0.6% in February, compared with a rise of 1% for the same month last year.
The Federal Reserve has today held interest rates in a range between 5.25% and 5.5%, with the strength of the US economy reinforcing its desire to wait before implementing cuts, writes Andrew Michael.
Explaining its reasons, the Fed said: “Recent indicators suggest the economic activity has been expanding at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
“In considering any adjustments to the target range… [we] will assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%.”
Earlier this month, official figures showed that annual headline US inflation had nudged up to 3.2% in the year to February 2024, from 3.1% a month earlier.
The ONS said the largest downward contributions to the monthly change in the annual CPI and CPIH rates came from food and restaurants and cafes. This was offset by rising prices for housing and household services and motor fuels.
Grant Fitzner, ONS chief economist, said: “Inflation eased in February to its lowest rate for nearly two and a half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared to a large rise last year, while restaurant and café price rises also slowed.
“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”
The Bank of England, which is mandated by the government to keep long-term UK inflation at 2%, has maintained interest rates at their 15-year high of 5.25% since August last year.
Tomorrow, the Bank’s Monetary Policy Committee makes its latest pronouncement on borrowing costs. The strong expectation is that the influential Bank Rate will remain unchanged for the eighth month in a row from its 16-year high of 5.25%.
But today’s news offers hope that the UK’s central bank could start to bring down interest rates in the summer.
Alice Haine, personal finance analyst at Bestinvest, said: “Naturally, most households would welcome an interest rate cut tomorrow, but the BoE is expected to keep interest rates at the current level for the fifth successive meeting following 14 consecutive increases between December 2021 and August 2023. With the first rate cut not expected until the summer, all eyes are pinned on what the central bank has to say to see if there are any hints of earlier action.”
Lindsay James, investment strategist at Quilter Investors: ““With signs that the UK has already returned to a modest level of growth despite interest rates remaining high, this inflation reading will give confidence to the Bank of England that inflation is now coming to heel.
“As it looks likely to fall further in coming months, with the 12% cut to the energy price cap kicking in from April, the Bank’s monetary policy committee will be under further pressure to consider rates cuts sooner rather than later.”
Tom Stevenson, investment director at Fidelity International, said: “Inflation is likely to continue dropping through the spring as cheaper gas and electricity from April drives household energy costs lower. The key unanswered question is whether, and by how much, price growth bounces back from target in the second half of the year.”
12 March: UK Updates To Follow Next Week
Today’s US inflation figures show prices rising by a headline rate of 3.2% in the year to February, a shade up from the 3.1% annual rise recorded in January, while month on month the increase was 0.4%, up from 0.3%.
The core annual rate, which excludes notoriously volatile food and energy prices, fell to 3.8% from 3.9%, with the core monthly rate unchanged at 0.4%.
Inflation figures in national economies are used by central banks such as the Federal Reserve (Fed) in the US and the Bank of England to determine interest rate policy.
The…
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