Let’s start with the good news.
After almost three years in which inflation was well above the Bank of England’s 2% target, it is finally back at levels that could be considered “normal”.
Latest money: interest rate reduction is a blow because inflation falls less than expected
Inflation is the rate at which prices are changing over the past year, and this annual rate fell by 3.2% in March to 2.3% in April. But while it’s in “normal” territory, there are some reasons for caution.
Reasons for caution
The first is that the annual rate was actually expected to fall further: the consensus forecast among economists was for it to fall to 2.1%. The second is that when we look at the numbers, they look considerably more inflationary than we might expect.
Underlying inflation – which is what you get when you exclude volatile items like food and energy – is still rising at 3.9%, which was not only higher than the overall rate, but considerably higher than economists expected.
Even more worrying, as far as economists were concerned, was the fact that services inflation – which measures changes in the prices of everything from haircuts to legal services – barely fell, falling from 6% to 5.9%. %.
Economists had expected that number to fall to 5.4%.
All of this is to say that while the overall drop in numbers is reassuring, there is a lot that is not.
An instant interest rate reaction
In fact, in financial markets, where investors constantly bet on the probability of interest rate changes, there was an instantaneous reaction.
Although, in the minutes before the release of the inflation data, investors placed a 50% probability of the Bank of England cutting interest rates at its next meeting in June, this probability fell to just 14% after the inflation data.
But there is a deeper reason to be cautious about declaring “mission accomplished” regarding the cost of living crisis today, which is that, for most people, the crisis does not yet appear to be over.
A crisis that is not over
The thing to remember here is that inflation typically only measures changes in prices over the past year. And specifically last year, prices only rose 2.3%. In large part, this is because energy prices fell during this period.
However, as we all know, although energy prices may have fallen last year, they are still much higher than they were a few years ago.
The same goes for general prices. In fact, look at the difference between price levels today and mid-2021, the start of the period of above-normal inflation, and they are up a whopping 20.5%.
Now, much of this is a consequence of higher energy prices following Russia’s invasion of Ukraine. But the point is that we have had a radical change here.
It’s not like prices have gone down, and although wages are now rising faster than inflation, they have not kept pace with prices – which means we are all worse off.
Still: inflation returned to normal levels. The Bank of England is also expected to reduce interest rates – although not as quickly as previously predicted. And the economy came out of recession. Things are getting better. But we’re not completely out of the woods yet.
This story originally appeared on News.sky.com read the full story
