UK inflation is poised to tumble to its lowest level in over a year in what is expected to begin a steady descent from its multi-decade highs, new figures out this week are likely to reveal.
The rate of price increases in April is tipped to have dropped markedly to 8.2 per cent last month, down from 10.1 per cent and to the lowest level since March 2022 when it rose to seven per cent, according to City analysts.
That would take inflation out of the double digits for the first time since last summer.
Living costs have been rising rapidly for more than a year, initially driven upward by supply chains buckling under the weight of a sudden surge in demand after Covid-19 lockdowns were ditched.
Russia’s full-scale invasion of Ukraine lit a rocket under international energy prices, pushing up UK household energy bills to what could have been more than £4,000 without the government stepping in and capping bills at £2,500 last year.
While that intervention has averted the biggest hit to average living standards on record, it has knocked Britain’s finances, forcing the government to borrow £22.4bn last month, markets expect.
UK inflation is more than five times the Bank of England’s two per cent target
Governments have to borrow cash to finance spending on things like schools and hospitals when the amount of revenue they raise is lower than their expenditure.
A combination of poor weather and the Russia-Ukraine war jolting raw material production has also squeezed food supplies, putting upward pressure on supermarket prices, which have climbed nearly a fifth over the last year – the fastest acceleration since the 1970s.
However, the cost of living crisis that has knocked the poorest households’ finances is poised to slowly ease as the year progresses, but food price inflation may take longer than headline consumer prices to decelerate.
Comparisons with last year’s jump in energy prices will force the headline consumer price index lower, although “further downward pressure will come from fuel prices,” Andrew Goodwin, chief UK economist at consultancy Oxford Economics, said.
Any signs that core inflation – which is running over six per cent – is failing to fall substantially in response to the Bank of England’s twelve successive interest rate rises could seal another increase at the monetary policy committee’s (MPC) next meeting on 22 June.
Bank Governor Andrew Bailey and other rate setters will break down the reasons why they lifted borrowing costs earlier this month by 25 basis points at a grilling MPs on the treasury committee on Tuesday.
The Bank earlier this month said it thinks inflation will dip below its two per cent target in a couple years if rates stay at 4.5 per cent. It also said most of the upside inflation shock since the turn of the year has been almost entirely by rapidly rising food prices.
Markets think the MPC will hoist rates at least one more time and start cutting them early next year.
Latest purchasing managers’ indexes from S&P Global and the Chartered Institute of Procurement and Supply on Tuesday could show the UK economy is racing away from the much-tipped recession.
A reading of 55.5 points for the services is priced into the financial markets, far above the 50 point growth threshold, but slightly lower than April’s figure “as consumer spending starts to normalise a little after a surprise surge in March,” Sanjay Raja, senior economist at investment bank Deutsche Bank, said.
The manufacturing PMI is likely to fare much worse at 48 points in May.
Retail sales numbers from the ONS on Friday are poised to show families are trimming spending in response to high inflation and interest rates squeezing their finances. Sales are forecast to have dropped three per cent over the last year.