UK inflation back on target
22 May 2024UK inflation has now fallen back in line with government targets.
UK inflation continues to fade, according to ONS data.
“All items” inflation declined from 3.2% year-on-year in March 2024 to 2.3% in April, when measured by the CPI method. Inflation is now aligned with the government’s target of 2.0% (plus or minus 1.0%) for the first time since Summer 2021.
This news may increase pressure on the Bank’s Monetary Policy Committee (MPC) to reduce base interest rates. Such a move would support demand in the economy, which would be welcome but might also delay further reductions in inflation. Generally, however, the MPC has been very cautious around reducing base rates and has been careful to manage expectations on this – as have other major central banks.
A key reason for lower inflation was the falling costs of household energy. A further contribution came from motor fuel prices. Fuel prices are down year-on-year although they have risen somewhat over recent months, and this may be a concern for some shoppers.
Prices for some goods are falling, but services are still making a major contribution to inflation. Service inflation is driven by wage change and is therefore likely to be persistent – one reason for the MPC’s caution.
“Food and drink” inflation fell from 4.0% in March to 2.9% in April, slightly under-shooting IGD’s forecast – early in 2024, we suggested that food inflation would be around 3.5% in April.
Foodservice inflation fell from 5.8% in March to 5.7% in 2024.
IGD Viewpoint
The reduction in overall inflation is generally welcome, although it does not imply that the cost of living is falling, and many households remain under financial pressure. This pressure shapes consumers' approach to food and grocery shopping.
IGD’s ShopperVista research (available to subscribers) suggests that fewer shoppers than previously now expect strong food price increases in the next 12 months. Financial confidence and confidence in the grocery sphere specifically have also improved over the last year.
The downturn in food and drink inflation has been in place for some time now and is likely reaching the end – IGD anticipates that inflation will level off soon, remaining low but positive.
Businesses will implement tactical price cuts where possible, but these are unlikely to reverse recent increases. More affordable food is likely to result from recovery in incomes rather than lower food prices.
The picture is generally positive but, as always, there are many risks as far as food price inflation is concerned, especially geopolitics, weather and labour issues.
IGD will issue its next food price inflation forecast in the July Viewpoint report.