Experts are forecasting that UK inflation is set to fall close to the Bank of England’s 2 per cent target for the first time in nearly three years, sparking hopes that interest rate cuts may be imminent as the two-year cost of living crisis begins to ease.
The Office for National Statistics will publish the latest Consumer Prices Index (CPI) inflation data for April on Wednesday (May 22), with economists and homeowners hoping it will cause the central bank to lower rates. Inflation has been gradually decreasing in recent months, providing relief for households and businesses who have been grappling with rapidly escalating prices.
According to a consensus compiled by Pantheon Macroeconomics, CPI inflation is projected to drop to 2.1 per cent in April from 3.2 per cent in March. This would represent the lowest level since July 2021 when inflation was recorded at 2 per cent the Bank of England’s target level.
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The main factor behind the cooling of price rises last month is expected to be lower gas and electricity prices compared with the previous year. However, experts said the level of services inflation in the latest official data release will be closely scrutinised by those tracking the Bank of England’s next move.
Pantheon anticipates services inflation to decrease to 5.4 per cent in April from 6 per cent in March. Experts suggested that April’s data could be pivotal for the Bank, which has been awaiting solid evidence that CPI has hit its target level before it can reduce interest rates.
Currently, UK borrowing costs are at a 16-year high of 5.25 per cent, and the Bank’s Monetary Policy Committee is scheduled to meet again in June.
Commenting on the situation, James Smith, a developed markets economist for ING, said: “It’s no exaggeration to say that this week’s UK inflation data will make or break a June rate cut from the Bank of England.
“The result is that headline inflation will, we think, dip below the Bank of England’s 2 per cent target in May’s data due in June and stay there for most if not all of this year.”
“While returning inflation to target is psychologically significant, and symbolic of how much progress has occurred since inflation peaked above 11 per cent, it is unlikely to be the number watched most closely by the Bank of England and investors,” expanded Luke Bartholomew, senior economist for Abrdn.
He concurred with Smith’s uncertainty over services inflation stating, “But in the very short term, there’s still some uncertainty over services inflation.”
“That’s ultimately what the Bank is most interested in, and it seems to have assumed even greater prominence in the monetary policy decision-making process given recent volatility in the wage figures.
“If services inflation comes in line with expectations, this will keep a June rate cut in play. But a large upside surprise will likely see the market scale back its bets on a June cut, and start to look to August for the beginning of the easing cycle.”
