CPI inflation experienced a decline to 3.2% in March, a slight deviation from economists' predictions. This decrease marks a 0.6% increase in prices over the month, compared to a 0.8% surge recorded a year earlier. Notably, this is the lowest inflation rate observed in two and a half years, significantly down from its peak at 11.1% in October of the previous year.
The primary factor contributing to the decline in inflation was the decrease in food prices, while the upward pressure came notably from petrol prices. Core CPI inflation, which excludes energy, food, alcohol, and tobacco, stood at 4.2%, down from 4.5% in February. Furthermore, the CPI services rate also saw a decline to 6%, down from 6.1%.
In terms of implications, this inflation trend has various impacts across different sectors:
1. Annuities: With inflation edging closer to the target, annuities might experience a shift, although interest rate cuts remain unlikely in the near term.
2. Savings: The decrease in inflation could potentially influence saving behaviours, with the prospect of maintaining or even increasing the value of savings over time.
3. Homeowners: The moderation in inflation rates might offer relief to homeowners, particularly in terms of managing household expenses and mortgage repayments.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, remarked on the inflation figures, noting that while the decline was anticipated, it slightly deviated from forecasts. She highlighted the role of petrol prices in offsetting the deceleration in food price increases.
(Source: Adapted from the ONS release on Consumer Price Inflation, UK – Office for National Statistics)
While consumer prices are showing signs of improvement, the Bank of England's course of action isn't solely determined by the headline inflation rate. Policymakers scrutinize various data points, and the recent report indicating persistent wage growth remains a concern. Despite a rise in unemployment, the unreliability of labor market figures suggests that the surge in joblessness hasn't yet translated into a significant slowdown in wage hikes. This is partly due to ongoing competition for talent in key sectors of the economy.
Although core inflation, excluding volatile food and fuel prices, is also moderating, currently standing at 4.2%, there's apprehension that employers might pass on higher wage costs through increased prices in the coming months. Consequently, the prospect of interest rates remaining at elevated levels for an extended period is gaining traction, with forecasts increasingly pointing towards August or September for any potential adjustments.
In line with cautious approaches adopted by other central banks, particularly the Federal Reserve in the United States, there's a continued commitment to combat inflation. Fed Chair Jerome Powell has indicated that interest rates might need to remain elevated for a prolonged period, reflecting diminishing confidence in curbing the inflationary spiral.
Implications:
Annuities: Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, notes that with inflation at its lowest in two and a half years, pensioners may find relief in managing their finances. The recent 8.5% boost to the state pension provides some breathing space for budgets and future planning. However, retirees considering annuities face a nuanced decision. While a level annuity offers higher starting incomes, there's a risk of eroding purchasing power during periods of high inflation. On the other hand, inflation-linked annuities provide protection against inflation but offer lower initial incomes, posing challenges for budgeting.
Savings: Sarah Coles, head of personal finance at Hargreaves Lansdown, suggests that savers could benefit from the current inflation rate of 3.2%. There are savings and cash ISA rates available that outpace inflation across various markets, from easy-access to longer-term fixed-rate deals. While easy-access rates have shown strength, there's a likelihood of rates declining as inflation comes under control, emphasizing the importance of securing competitive deals promptly.
Homeowners: Over-extended homeowners awaiting a remortgage might anticipate a rate cut, given the gradual improvement in inflation figures. However, the Bank of England remains cautious, considering ongoing inflationary pressures and rising wages. The average 2-year fixed-rate mortgage has hovered around 5.8%, with minimal movement anticipated in response to the latest inflation data. Nevertheless, homeowners can expect relief in the form of easing mortgage rates in the coming months, alleviating budgetary pressures.
(Source: Adapted from original statements by experts at Hargreaves Lansdown)