The Industry reacts as UK inflation falls to 2.3%

by | May 22, 2024

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Following the announcement from the ONS that UK inflation has fallen to 2.3% in the year to the end of April, its lowest level for almost three years – but still shy of the Bank of England’s 2% target – industry experts have shared their thoughts with IFA Magazine.

So what do these data mean for investment and mortgage markets? Industry experts have been zooming in on what the news might mean for the chances of the UK seeing interest rates starting to fall this summer, as it has certainly given the Bank of England’s MPC plenty to chew over ahead of their next meeting in June.

Abhi Chatterjee, Chief Investment Strategist, Dynamic Planner said: “ Prices, as measured by the CPI Index, rose slower in April at 2.3% for the last 12 months, compared to 3.2% in March. While that gives cause for much self-congratulation, it came in higher than the Bank’s forecast of 2.1%. Falling energy costs was the main contributor in slower price rise. This should provide a clear indication that inflation is proving stickier than expected given widespread pricing pressures within the economy, being reflected through stronger wage growth and services inflation. This should temper the expectations of a summer rate cut.

 
 

“Being evidence driven, a dilemma for the MPC now becomes whether it waits for data confirming that “the risks from inflation persistence are receding” or taking the fall in inflation as a signal for moving into an easing cycle. In the first instance, the Bank will be late in cutting rates, and in the second, it will be ahead but runs the risk of fuelling more inflation, needing it to roll back the cuts. Either way, one does not envy the position of policy makers at the Bank, as choices must be made. But, as John F Kennedy once said, “The easiest decisions are often the wrong ones.”

Matthew Rees, Head of Global Bond Strategies at Legal & General Investment Management (LGIM), comments:

“Today’s UK inflation numbers are yet more evidence that services sector inflation is still running too hot for comfort. On the back of these numbers, we’ve seen investors rapidly re-assessing bets on June rate cuts, pushing up UK interest rates and driving sterling higher.

 
 

“The sticky inflation numbers keep us comfortable with our low duration (interest rate risk) position. While inflation remains high, the insurance value of duration is likely to remain low. We also continue to hold most of our duration outside of the UK, preferring Australian and US duration exposures. Forecasting inflation is one of the hardest things portfolio managers do (and some central banks’ forecasts are negatively correlated with outcomes, as stipulated in our recent blog).”

According to LCP Partner ,Steve Hodder, falling inflation boosts UK DB Pension stability, but details reveal the full story as he comments:

“Continued falls in headline CPI offer a welcome return towards stability for the UK’s DB pension schemes.

 
 

“The financial health of most schemes is reasonably immune to the level of inflation because of the way schemes typically invest.  But stability is always a good thing and will help with planning after a period of considerable volatility and uncertainty.

“However, we’re not out of the woods just yet.  Many analysts were expecting a larger fall, and the details behind the figures reveal that once you strip out the impact of the falling energy price cap, core inflation (in particular services) remains stubbornly high at 2-3x the BoE’s target.”

Ben Nichols, Interim Managing Director at RAW Capital Partners, said: “Borrowers, brokers, and lenders can afford themselves a quiet sigh of relief as inflation continues its retreat towards the Bank of England’s 2% target. With inflation seemingly under control, the likelihood of summer interest rate cuts grows more certain—a welcome development for homebuyers and mortgage-holders alike.”
 
“Now, it’s important to note that rates won’t decrease as quickly or significantly as they rose, but a stable inflation climate should still boost economic confidence, encouraging investment and growth in the UK property market. What’s more, with many investors having paused their buying plans in recent months, pent-up demand could spark robust market activity in the short to medium future.
 
“That said, it’s important to remember that rates are still much higher than we grew accustomed to in the 2010s. As such, lenders and brokers must continue to collaborate and support borrowers navigating the challenge of higher mortgage payments.“

 
 

Damian Cocking, Head of Sales at Flagstone International, comments: “Today’s data suggests that we have scaled, but not fully descended, the inflationary mountain in the UK as the Bank of England’s 2% target remains elusive.

“There are now two important quandaries facing the Bank of England and the Monetary Policy Committee. Firstly, how far away are we from inflation being tamed and when can they start to cut base rate and ease pressure on UK mortgage holders and the wider economy. Today’s data suggests a June cut to base rate now looks far less likely and that any planned cuts will be pushed back again.

“Despite that, the direction of travel for UK base rate is most likely to be down over the long-term and for those managing cash deposits in UK and internationally it would be wise to consider which jurisdictions are likely to deliver the best returns on cash over the medium to long-term.”

 
 

Steven Cameron, Pensions Director at Aegon, explains what today’s 2.3% inflation figure could mean for the future of the contentious State Pension Triple Lock, saying:

“The latest drop in the inflation rate to 2.3% will be widely welcomed as a sign that price inflation is finally getting back under control, helping alleviate the cost-of-living crisis and hopefully paving the way to future falls in interest and mortgage rates. It’s also significant for the State Pension Triple Lock, which grants State Pensioners an annual increase equal to the highest of price inflation, earnings growth or a minimum rate of 2.5%.

“For the April 2024 increase, earnings growth in 2023 produced an inflation-busting 8.5% increase. In April 2023, a spike in inflation the previous year led to a record-breaking 10.1% boost to the State Pension. These increases and the underlying high volatility that was present in both price inflation and earnings growth, have since raised serious questions over longer term affordability of the State Pension, which is paid for by today’s workers.

 
 

“With inflation having now fallen below the 2.5% underpin, it’s likely to be earnings growth that determines next year’s Triple Lock increase, as the latest figures have this sitting at 5.7% (for January to March 2024). The specific figure used for determining the Triple Lock will be the year-on-year increase in earnings for the period ending May to July 2024, which will be published in September. Barring a significant drop in earnings growth over the next few months, this figure will likely determine next year’s Triple Lock.

“If price inflation stays low and earnings growth also gradually falls back to levels more typical of the last decade, then the State Pension Triple Lock formula may produce more predictable and affordable increases. This will make it less costly for the next Government to commit to maintain it for a further 5 years. We may see lower rates of increases, but in times of lower inflation, the State Pension doesn’t need to increase by as much to allow pensioners to maintain living standards.

“However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”

 
 

Derrick Dunne, CEO of YOU Asset Management, comments: “There’s not much in the way of surprises in today’s inflation figures, but a few areas will leave the Bank of England pondering its next move. With inflation back effectively to target, the monetary policy committee (MPC) will be considering when, not if, rate cuts should follow. However, those wishing for swingeing rate cuts to ease pressure on households might not immediately get what they want.

“With the economy growing again and the fabled ‘soft landing’ apparently achieved, the incentive to cut rates is less strong. Chances are we’ll see that cut in the Summer, although persistent services inflation, alongside robust wage growth, will dampen the enthusiasm for it. It is possible we’ll see the MPC hold fire until there’s strong evidence that wage growth is cooling, which could be late in the Summer.

“UK markets have enjoyed strong performance too, despite the higher rate environment, with the FTSE100 hitting several highs in recent weeks. That being said, market rates for savings and mortgages are going to crumble on the anticipation of rate cuts. This is good news for households without the Bank even having to lift a finger.

 
 

“In a turbulent and quickly changing market, the message for investors is clear. Maintaining a well-diversified portfolio is crucial to being able to manage a wide range of potential outcomes. Anyone unclear on how they should be positioning should speak to an adviser.”

Luke Bartholomew, senior economist, abrdn, said: “While inflation continues to fall sharply, this report will come as a disappointment to the Bank of England and investors looking for a rate cut in June. In particular the strength of core inflation and services inflation, both of which came in a fair bit stronger than expected, will make it harder for the Bank to feel confident that underlying inflation pressure is cooling adequately. There is another inflation and labour market report  between now and the Bank’s June meeting which taken together could change the debate again, and certainly the market is likely to remain volatile in it assessment of the likely path of policy. But for now, the case for August over June for the timing of the first cut is looking stronger today.”  

Colleen McHugh, Chief Investment Officer of Wealthify, comments: “If around 80% of the UK economy is driven by the service sector, keeping an eye on Services inflation data is a no-brainer for the Bank of England – it’s the Services Inflation data, ‘stupid’. 

 
 

“As the Bank of England gears up for its first rate cut, today’s inflation data is one of only two reports set to drop before their next interest rate meeting on June 20th. Eyes were therefore laser focussed on the services element of today’s data, which revealed inflation for services dipping to 5.9% from March’s 6.0% handle, falling short of the Bank of England’s expectations (5.5%), and overshooting the consensus of 5.4%. 

“After last week’s decision to hold the base rate at 5.25%, BoE Governor Andrew Bailey struck a doveish tone in his ensuing press conference. With a divided bank committee, he may need more evidence to be comfortable with cutting rates. If it were a coin toss for a June rate cut before today’s inflation numbers, the coin is now surely weighted toward an August cut. ‘Stop Right Now’, though, we have one more inflation print to drop the day before the next Bank of England meeting!”

Mark Taheny, Managing Director at corporate finance advisor Centrus, commented: “The recent trajectory has been gradual but consistent, inching closer to the coveted 2% target at 2.3%. 

“Despite declines in energy, food, and core goods prices over the past six months, Q1 of 2024 has witnessed sustained strength in wage growth. This phenomenon can fuel services inflation, potentially leading to the familiar narrative of resilient yet stagnant services inflation.”

“Echoing the findings from the March CPI reading, the latest CPI figure could postpone or negate the possibility of an interest rate reduction this summer. This scenario would dissuade market timers and instead prompt investors to secure rates, mitigating potential future volatility.”

George Sweeney, DipFA, financial advisor at personal finance site finder.com gives his thoughts: “Today’s figures had been described as a ‘make or break’ moment for the Bank of England’s decision to cut interest rates this summer, and unfortunately it looks as though things haven’t quite swung in the direction everyone was hoping for. Although it’s great news to see that inflation is still coming down, many had high hopes that today would be the day the Bank of England finally reaches its 2% target, and these results may therefore come as a disappointment.. 

“Many mortgage holders have had their household budgets stretched to the extreme over the last couple of years, and over a million are due to end fixed-rate periods this year, so will have had fingers and toes crossed for a more solid signal that the Bank of England would finally begin to lower the base rate in the upcoming MPC meetings this summer. It remains to be seen whether they will be satisfied enough with these numbers to take action in June or August. With all the effort it’s taken to get this far, they’re going to want to avoid jumping the gun and acting too hastily.”

Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management (JPMAM) comments: “UK households will be pleased with today’s news; after a turbulent couple of years, inflation in the UK is now in touching distance of the 2% target and is lower than in both the eurozone and US. A sizeable fall in headline inflation was widely anticipated given the 12% drop in Ofgem’s energy price cap in April, and the broader deceleration seen across other components in recent months, notably food and core goods. 

“While today’s meaningful decline is welcome news, the Bank of England will be disappointed by the 0.2% pt upside surprise in the headline figure. Although this was mainly a result of an upswing in motor fuel prices, concerns will remain around the stickiness in some underlying components. Critically for the policymakers at Threadneedle Street, services inflation – a useful gauge of inflation persistence – came in a lot hotter than its latest projections. 

“Given the recent divergence in opinions across the Committee, the upside surprise in services inflation may dent the Bank’s confidence that entrenched inflationary pressures are receding. While the Bank will still be able to take its foot off the brake this summer, a June cut now looks less likely. In our view a cut in June would be premature; if the economy were slowing we would expect core inflation to follow headline lower, but recent data has shown activity reaccelerating.”

Paresh Raja, CEO of Market Financial Solutions, said: “At long last, the UK’s rate of inflation has fallen to around the Bank of England’s (BoE) target of 2%, offering a significant reprieve for investors after three years of eyewatering price increases. With purchasing power now returning to a more normal level, the positive house price data that we have witnessed in the last week is likely to be compounded as more investors look to re-enter what is now a recovering market.

“However, it is important to acknowledge that while inflation is trending downwards, we are still not at a point where interest rates are going to be reduced significantly. Indeed, the BoE’s Deputy Governor has indicated that rates will be cut this summer, but the journey to a more manageable base rate will continue for some time.

“Therefore, it is crucial that lenders and brokers play a supportive role for investors as they transition to a more open monetary landscape. By providing bespoke financial products and a high level of certainty, they can ensure continued positive momentum as inflation continues to fall.”

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said: “The news that inflation has dropped to within touching distance of the Government’s 2% target will come as a great relief to many. However, now is not the time for premature celebration.

“People mustn’t be swayed into thinking the economy is ‘back to normal’; caution should be exercised. Prices and core inflation are still at high levels. The long-lasting effect of a high-inflation environment cannot be reversed in one fell swoop, and those who are still battling with expensive household bills and repayments must continue to be proactive with their finances.

“With the 2% target within reach, the Bank of England will no doubt be considering interest rate cuts in the coming months. So, people should take advantage of the current positive savings outlook, explore their options and maximise their returns before they lose their opportunity.”

Danny Vassiliades, Partner at XPS Pensions Group, commented: “The ONS has today announced that CPI inflation fell to 2.3% in the year to April 2024, the lowest annual rate since July 2021. All eyes are now turning to the potential timescale of interest rate cuts, with hopes buoyed by the deputy governor of the Bank of England’s comments that summer cuts are “possible”.

Falling inflation represents good news for many private sector defined benefit members who have recently experienced inflation above their maximum guaranteed pension increases for the first time in decades. With the lowest such guarantees typically around 2.5%, defined benefit pensioners will be hoping that inflation remains at its current levels to protect against a repeat of the real income cuts they have experienced over the last two years.”

Ben Thompson, Deputy CEO at Mortgage Advice Bureau, said: “Inflation in April being just 0.3% above the Bank of England’s 2% target could be the spark to light the fire of the housing market. With inflationary pressures slowing closer to levels that the Bank of England are likely to be happy with, swap rates will fall further, and therefore those remortgaging or buying will see rates fall as a result. As we edge closer to a transformative period in the housing market, now is the time to speak with a broker and get mortgage ready.”

Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services said: “Today’s data announcement by the ONS shows that the UK’s consumer price inflation came close to reaching the Bank of England target of 2% in April. Inflation peaked at 11.1% just 18 months ago and has been away from target for three long years. 

“This plunge in headline inflation comes as a consequence of the lower energy price cap announced in early April, as well as falling energy and food prices. This is not to say that prices did not rise at all in April, with consumers feeling increases in services such as TV licenses, mobile phone contracts and water supply. However, April saw the rate of increase in core prices drop relative to this time last year. 

“Reaching the Bank’s target inflation rate is a long-awaited milestone for hard-pressed households across Britain. More encouragingly, this is unlikely to be the bottom of the cycle. In under a month’s time, the Bank will vote on the base rate, with favourable prospects for lower rates and reduced inflationary pressures beyond June.” 

Karen Barrett, CEO and Founder of Unbiased said: “Yet another fall in the inflation rate shows promising signs that the UK economy is on the right track, but we shouldn’t jump to conclusions, as prices are still increasing – just at a slower rate. This data creates hope for a possible cut in the base rate in the coming months, which has been held since last August when it was hiked to 5.25%, despite expectations of a cut in May. Should the base rate be cut in June or August as expected, mortgage rates will likely follow suit.

“However, there is no guarantee of a base rate cut and mortgage holders should make themselves aware of their options in either scenario. If your mortgage is coming to an end soon, it’s worth considering whether you want a fixed-rate deal and when. Going onto a lender’s standard variable rate (SVR) is expensive, with average rates of over 8% compared to fixed-rate deals of around 5.8%. If you have savings and want the best rate, it’s worth considering opening a fixed-rate account now to lock in a decent one.

“Savings rates will likely fall when the base rate is cut, so you may want to consider investing for higher returns. If you want a guaranteed income in retirement for either a fixed period or long-term, it’s worth considering an annuity as rates will also likely fall if the base rate is cut. In the current turbulent economic climate, it can be tricky deciding when to make big financial decisions, so consider getting expert advice from a qualified financial adviser.”

Simon Webb, managing director of capital markets and LiveMore, commented: “Inflation has fallen again, reaching 2.3% in April, down from 3.2% in March. This continues the welcome trend we’ve seen since the October 2022 peak.”

“This sustained decline reflects real progress towards the Bank of England’s 2% target. While still some way to go, this is a significant improvement on the inflationary pressures of the past year.”

“Core inflation, a key metric for the Monetary Policy Committee, reflects this downward trend as well. This data should provide some breathing room for the MPC regarding interest rate decisions.”

“We remain optimistic about the UK’s economic recovery, albeit a gradual one. But we recognise that older borrowers and mortgage prisoners will still be feeling the pressures of the continuing high cost of living. We encourage them to seek well-informed advice to capitalise on opportunities presented by this improving economic climate.”

Lily Megson, Policy Director at My Pension Expert, said, “Further easing in inflation towards the Bank of England’s 2% target will be music to the ears of savers. Indeed, record levels of inflation over recent times have been disastrous for people’s savings, eroding their real value as returns struggled to keep pace with rising prices.

“Yet, beyond the positive headlines, UK pension planners may still face a challenging reality. Soaring prices and household bills have made it a nightmare to save for retirement, meaning many are not putting anywhere near enough into their pension pot.

“The government must recognise that figures like today’s do not mean the fight for financial security is over – far from it. Instead, they should work to collaborate with the financial services sector to prioritise financial education and accessible advice for all. Not only does this enable people to take control of their financial futures, but it makes sure that all benefit from an economy in recovery.”

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