Friday, December 27, 2024

UK inflation falls by less than expected to 2.3%, reducing chance of June rate cut

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UK inflation fell to 2.3% in April – its lowest level for almost three years – but the decline was smaller than expected, denting hopes of a return to the Bank of England’s 2% target.

City analysts had forecast the annual increase in the cost of goods and services would fall to 2.1%. Markets trimmed their predictions of that the Bank will cut rates by 0.25 percentage points from 5.25% as early as next month, with forecasts of reduction in August also scaled back.

The drop in the consumer prices index last month, down from 3.2% in March, was driven by easing energy and food costs. The last time it was lower was in July 2021.

Illustrating the pressure on household budgets and the reluctance to purchase big-ticket items, furniture retailers cut prices by 0.9% between March and April, and the cost of all goods dropped by 0.8%.

Yael Selfin, the chief economist at KPMG UK, said it was possible the likelihood of an interest rate cut as soon as next month had receded. “Falling inflation closes in on the Bank of England’s target but may not be enough to sway an early rate cut,” she said.

Services inflation, which mainly reflects the costs companies charge each other, rose by 6%.

Inflation was stubbornly high for much of last year, mainly because of a rapid rise in the price of imports.

The Office for National Statistics said inflation was prevented in the last month from slowing more by a rise in petrol and diesel prices, although the price of a barrel of Brent crude has steadied recently at about $83.

Paula Bejarano Carbo, an economist at the National Institute of Economic and Social Research, said core inflation remained higher than its historical average at 3.9% and this would need to fall before the central bank’s monetary policy committee was comfortable cutting rates.

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“Paired with last week’s strong wage growth data, we believe that elevated services inflation will remain an upwards risk to inflationary pressures in the second half of this year. As a result, the MPC may exert caution at its upcoming meeting and hold interest rates, despite today’s encouraging fall in the headline rate.”

Prices grew by 2.4% in the 20-member eurozone in April, the same as the previous month.

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