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The UK is on course to have slower inflation than both the Eurozone and the US for the first time in over two years as falling energy prices for consumers cut Britain’s rate of headline price growth.
Annual growth in consumer prices for April is predicted to drop to 2.1 per cent when official figures are published on Wednesday, close to the Bank of England’s target of 2 per cent, according to forecasters polled by Reuters. The reading would be sharply below March’s 3.2 per cent figure.
Economists say the drop is largely the result of a 12 per cent fall in the regulatory cap on household energy bills last month, following a decline in wholesale gas prices.
If the forecasts are correct, April would be the second straight month in which UK inflation was lower than consumer price inflation in the US, and the first time since March 2022 that it was below both the US and Eurozone rate.
The figures from the Office for National Statistics will further fuel debate among policymakers at the BoE about when to cut rates from their 16-year high of 5.25 per cent. Some officials have pushed for a reduction as soon as the June meeting, although financial markets are pricing the first cut to be August.
“The international trend of the past two years will be turned on its head with inflation in the UK being lower than in the US and the Eurozone,” said Paul Dales, chief UK economist at Capital Economics. “This inflation forecast underpins our view that the bank will cut interest rates before the US [Federal Reserve] — perhaps in June but if not, in August.”
Lower inflation would provide a boost to Prime Minister Rishi Sunak after data this month showed the UK economy rebounding from last year’s recession in the first quarter, with growth of 0.6 per cent the fastest in two years.
But the slowing price growth has yet to reduce Labour’s consistent 20 point polling lead over the Tories. Overall UK consumer prices are still up 22 per cent since March 2021.
Inflation is 2.4 per cent in the Eurozone and 3.4 per cent in the US. Consensus Economics, a company that averages leading economists, said forecasters expect UK inflation to remain lower than in the US for the rest of the year, as a resilient US economy threatens inflation and delays the first rate reduction by the Fed. Economists expect the European Central Bank to push through an initial rate cut in June.
Inflation and labour market data will be an influential factor in the BoE’s decision on interest rates. The central bank wants to keep inflation sustainably at 2 per cent, rather than fleetingly touch the target.
Andrew Bailey, governor of the Bank of England, said after the May meeting of the bank’s Monetary Policy Committee that a key question was whether higher wages were being passed through to consumers, adding that the latest data “would tend to suggest it possibly isn’t”.
