Inflation slows to 3.4% but no Bank of England rate cut expected
Inflation eased to an annual rate of 3.4% in May, according to official figures released this morning, but the Bank of England is widely expected to leave interest rates on hold despite that.
The Office for National Statistics (ONS) reported the consumer prices index measure eased from 3.5% the previous month.
It said that despite upwards pressure on prices from food and clothing, the decline was driven by falls in airfare prices following Easter.
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The headline figure also reflected a small downwards correction to ONS inflation data ahead of April related to vehicle excise duty calculations.
ONS acting chief economist Richard Heys said: “A variety of counteracting price movements meant inflation was little changed in May.
FOOD INFLATION AT 15-MONTH HIGH
Today’s headline inflation number suggests a flat picture for price growth overall.
But there is one stat that households will already be familiar with after a visit to the supermarket.
A jump in some food prices has been noticeable, with the ONS flagging a leap in its food and non-alcoholic drinks measure of inflation to a 15-month high.
Why the rise? Chocolate has spiked significantly this year due to a cocoa shortage blamed on poor harvests. Meat, particularly beef, has shot up on high global demand and rising costs.
The food and non-alcoholic drinks category has been on the rise for five months in a row. But the good news is that high rates of sales promotions by chains – discounts – are helping keep a lid on overall grocery bills.
“Air fares fell this month, compared with a large rise at the same time last year, as the timing of Easter and school holidays affected pricing. Meanwhile, motor fuel costs also saw a drop.
“These were partially offset by rising food prices, particularly items such as chocolates and meat products. The cost of furniture and household goods, including fridge freezers and vacuum cleaners, also increased.”
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Forecasts suggest that inflation will tick up over the second half of the year – with effects from Donald Trump’s trade war and rising commodity costs amid events in the Middle East among the concerns ahead for the Bank of England.
It has adopted a “careful” and “gradual” approach to interest rate cuts as a result.
That is despite weakening employment data, reported earlier this month, which showed a tick up in the official jobless rate and a 109,000 reduction in payrolled employment.
Other elements of the inflation data are also supportive of an argument for rate cuts.
Core CPI inflation – a measure that strips out volatile elements such as energy and food – eased from 3.8% in April to 3.5% while services inflation tumbled sharply to 4.7% from 5.4% the previous month.
Nevertheless, the Bank is widely expected to leave Bank rate on hold on Thursday following the June meeting of its rate-setting committee.
LSEG data showed after the inflation data that financial markets currently see two more interest rate cuts by the year’s end.
Risks to prices ahead will come from a sustained Israel-Iran war pushing up oil and gas prices but there have been different views among policymakers over whether the trade war will result in inflation or not.
As such, the minutes of the Bank’s meeting will be closely scrutinised for hints on whether rate cut caution is easing.
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The average two-year mortgage rate has fallen below 5% for the first time since the Liz Truss mini-budget.
The interest rate charged on a typical two-year fixed mortgage deal is now 4.99%, according to financial information company Moneyfacts.
It means there are more expensive and also cheaper two-year mortgage products on the market, but the average has fallen to a near three-year low.
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Not since September 2022 has the average been at this level, before former prime minister Liz Truss announced her so-called mini-budget.
The programme of unfunded spending and tax cuts, done without the commentary of independent watchdog the Office for Budget Responsibility, led to a steep rise in the cost of government borrowing and necessitated an intervention by monetary regulator the Bank of England to prevent a collapse of pension funds.
It was also a key reason mortgage costs rose as high as they did – up to 6% for a typical two-year deal in the weeks after the mini-budget.
Why?
The mortgage borrowing rate dropped on Wednesday as the base interest rate – set by the Bank of England – was cut last week to 4%. The reduction made borrowing less expensive, as signs of a struggling economy were evident to the rate-setting central bankers and despite inflation forecast to rise further.
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Bank of England cuts interest rate
It’s that expectation of elevated price rises that has stopped mortgage rates from falling further. The Bank had raised interest rates and has kept them comparatively high as inflation is anticipated to rise faster due to poor harvests and increased employer costs, making goods more expensive.
The group behind the figures, Moneyfacts, said “While the cost of borrowing is still well above the rock-bottom rates of the years immediately preceding that fiscal event, this milestone shows lenders are competing more aggressively for business.”
In turn, mortgage providers are reluctant to offer cheaper products.
A further cut to the base interest rate is expected before the end of 2025, according to London Stock Exchange Group (LSEG) data. Traders currently bet the rate will be brought to 3.75% in December.
This expectation can influence what rates lenders offer.
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