UK Inflation Falls But Less Than Hoped

UK inflation has dropped to 3.2%, its lowest level in almost three years. However, the forecast was for 3.1%, making this a slightly disappointing result for the UK economy. In related news, core wage growth remains stubbornly high, posing a problem for the Bank of England as it seeks to navigate a difficult environment with multiple challenges.

Challenges Remain

UK inflation is still one of the highest rates in the G7, with only the US coming in ahead of it at 3.5%. However, two-and-a-half years ago, in October 2022, UK inflation was over 11%, meaning significant progress has been made. The UK government has claimed much of the credit for this, even though its efforts have had little overall effect; under normal circumstances, inflation tends to fall over time anyway, as price rises drop out of the back of the data set.

In addition, while inflation is down, consumers aren't feeling the benefits, since prices are still rising, albeit more slowly. The effect of past inflation is also baked into current prices. Only deflation would bring lower prices, but the risk there is economic contraction. Deflation tends to be self-reinforcing, as consumers defer spending in the knowledge that products and services will be cheaper in the future. Overall, prices are up around 20% since 2020.

Implications

Banks and building societies increased their rates on mortgages as a result. The Bank of England expressed cautious optimism about the possibility of interest rates cuts. However, confirmation will only come next month.

April's figures will be the most important for some time. At the beginning of the month, a cap on energy prices (a major cause of inflation) was reduced, and the effects of this will be known in a few weeks time.

However, headwinds remain. With renewed tension in the Middle East, as well as in Ukraine, any rise in the price of oil would bring additional inflationary pressure.

Current forecasts from the Bank of England suggest that inflation will drop "well below" the bank's target of 2% by the second half of the year.

Meanwhile, the upcoming Halving will reduce Bitcoin's rate of inflation to less than 1%, and it will never rise above that.