Inflation – May 2024

Inflation Hits Target for the First Time in Three Years

Key Points at a Glance:

• The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.8% in the 12 months to May 2024, down from 3.0% in the 12 months to April.
• The Consumer Prices Index (CPI) rose by 2.0% in the 12 months to May 2024, down from 2.3% in the 12 months to April.

For the first time in nearly three years, inflation has hit the Bank of England’s target of 2%. This significant milestone marks a decrease from the 2.3% annual rate recorded in April 2024. The steady reduction in inflation signals a potential shift in economic policy and provides a glimmer of hope for consumers and businesses alike.

Key Drivers of Inflation

The easing of the inflation rate in May 2024 was primarily driven by several factors:

• Food and Soft Drinks: A notable slowdown in price rises for food and soft drinks contributed significantly to the decrease in inflation.
• Recreation and Culture: Price stabilisation in the recreation and culture sector also played a crucial role.
• Furniture and Household Goods: The cost of furniture and household goods showed a marked slowdown, further aiding the reduction in inflation.

Historical Inflation

Inflation had previously soared to 11.1% in October 2022, the highest level in over 40 years. This spike was largely attributed to increased demand for oil and gas post-COVID-19 pandemic and further exacerbated by the geopolitical tensions arising from the Russia-Ukraine conflict. The dramatic rise in energy prices had far-reaching impacts on the global economy, leading to significant inflationary pressures.

Implications for Interest Rates

The latest inflation figures will be closely scrutinised by the Bank of England as it convenes to decide on interest rates. Currently, the interest rate stands at 5.25%.

Economists predict that the Bank may hold off on any immediate rate cuts, despite the positive inflation data, as they await more evidence of sustained control over inflation.

There is speculation that a rate cut might be on the horizon for August 2024 if the current trends continue. Maintaining higher interest rates helps in keeping inflation in check by curbing excessive economic growth, thereby stabilising prices.

Political Reactions

With a general election scheduled for 4 July, the recent inflation data has sparked intense political debate. The major political parties are using the figures to bolster their respective economic narratives:

• The Conservatives: They are likely to highlight the reduction in inflation as evidence of successful economic management and a turnaround in the economy.
• Labour: Despite the positive figures, Labour will continue to focus on the ongoing cost of living crisis, emphasising that food prices remain 25% higher than at the beginning of 2022, and petrol prices are once again on the rise.

Future Outlook

While the current drop in inflation to 2% is a positive sign, the Bank of England remains cautious.

Key future concerns include:

• Core Inflation: This measure, which excludes volatile elements such as energy and food, still shows persistent inflationary pressures.
• Wage Growth: With annual wage growth stubbornly high at 6%, there are fears that this could fuel further demand in the economy, potentially reigniting inflation.

Bank policymakers have expressed concerns about these factors and have indicated that it might be premature to relax the current monetary policies. There is also a view that making significant policy changes during an election campaign could be imprudent.

Conclusion

The reduction in inflation to the Bank of England’s 2% target is a noteworthy achievement, offering a potential respite for consumers and businesses. However, the broader economic landscape remains complex, with various factors needing careful consideration. As the Bank of England prepares for its next policy meeting, all eyes will be on how it balances the need for economic stability with the ongoing challenges of wage growth and core inflation.

For individuals and businesses, this period of relative stability could present opportunities to reassess financial plans and strategies. At Kerr & Watson, we are here to provide expert mortgage and protection advice to help you navigate these changing economic conditions.

Moving Forward: How We Can Help

As your dedicated advisors at Kerr & Watson, we’re here to help you navigate these changes. Whether it’s reassessing your mortgage options in light of the current economic climate or reviewing your insurance and protection plans, our team is equipped to provide tailored advice.

Contact Us for Bespoke Mortgage and Insurance Advice

Every financial journey is unique, and we’re committed to guiding you through yours with expert advice and personalised solutions.

Contact us to discuss how the latest economic changes can influence your mortgage and protection strategies.

Data Source: Office for National Statistics (ONS)

Read more: Consumer price inflation, UK: May 2024