Inflation could finally go below the Bank of England’s 2 per cent target for the first time in three years when April’s figure is unveiled this week.
The Consumer Prices Index (CPI) measure of inflation has been above 2 per cent in every monthly reading since July 2021, reaching a peak of 11.1 per cent in 2022.
But after years of high price rises hitting consumers’ wallets, the number could now be back at 2 per cent – or even below – when official figures for the year to April are released on Wednesday morning.
Pantheon Economics has forecast that it will be 2 per cent, down from 3.2 per cent in March, while Deutsche Bank and Oxford Economics have said they expect a reading of 2.2 per cent. Capital Economics expects an even lower figure, of 1.9 per cent, with the Bank of England forecasting 2.1 per cent.
Pantheon Economics said there were several reasons for the expected fall. It said: “First, Ofgem’s 12.3 per cent price-cap cut that took effect in April will slice 0.4 percentage points off CPI inflation.
“Second, food inflation shaves another 0.14 percentage points off overall inflation, as fading commodity-price rises pass through to consumers.”
However, forecasters generally expect core inflation – which does not include more volatile measures of inflation such as changes to food and energy pries – to be higher than 2 per cent.
Oxford Economics expects this figure to be 3.7 per cent – down from 4.2 per cent in March – and Deutsche Bank expects it to be 3.6 per cent.
Despite the fall, many experts have warned that inflation is set to rebound later in the year and go back above the target.
The Bank of England’s Monetary Policy Committee (MPC) warned in a report earlier this month that the inflation figure would increase slightly to around 2.5 per cent in the second half of 2024.
The major reason for this is that inflation is measured based on the growth in prices over the past year, so a large part of the figure is based on what prices were 12 months ago.
In April, the energy price cap – the maximum most households pay for each unit of gas or electricity used – was cut by the regulator Ofgem. In April 2023, the amount people were paying for their energy was at the highest level on record.
Energy prices started to fall in the second half of 2023, and experts are not currently expecting more dramatic cuts. This means that once we reach the second half of 2024, the annual price fall in energy will not be as dramatic as it is in current figures, which means it won’t have as big a downwards drag on the overall inflation figure as it’s currently having.
Sanjay Raja of Deutsche Bank explained: “Looking ahead, we continue to see CPI hovering around 2 per cent year on year in the second quarter if 2022, before tracking around two to 2.5 per cent year-on-year in the second half of 2024.”
Others however do not expect a return to above 2 per cent.
“We think it will fall further, perhaps even to 1 per cent later this year,” said Paul Dales of Capital Economics.
The Bank of England aims for inflation be around 2 per cent, and signs that inflation is falling can raise the prospect of it dropping interest rates – which are raised to counter high price rises.
Interest rates are currently at a 16-year high of 5.25 per cent, meaning borrowing costs – for example for those getting mortgages – are higher than they have been in the recent past.
Most economists have said they expect a first cut in August, though some have said one in June is a possibility.
Inflation returning to 2 per cent does not mean that prices are going down, it simply means that they are going up by less than before, but annual increases of around 2 per cent are considered to be healthy for the economy.
