Prices started to rise two years ago, but the Bank of England infamously claimed the upwards trend would be “transitory”. BoE governor Andrew Bailey soon had egg on his face as inflation proved to be more than a passing phase.
Prices soared due to shortages caused by the pandemic followed by the energy price shock triggered by Russia‘s invasion of Ukraine.
The official consumer price index (CPI) peaked at a staggering 11.1 percent in October last year, plunging the country into a brutal cost-of-living crisis.
Essentials rose at a much faster pace than that, with home energy bills doubling and food prices up 20 percent.
This forced the BoE to hike interest rates for 14 meetings in a row, to today’s level of 5.25 per cent.
Inflation has crept down this year but recent drops have been painfully slow.
Prices still rose by 6.7 percent in the year to September, well short of Prime Minister Rishi Sunak‘s target of stashing it to 5 per cent by the end of the year.
October’s figure is published tomorrow morning and City economists and analysts expect inflation has fallen to just 4.8 percent. That’s a drop of almost two full percentage points in a single month.
That would be the lowest reading since October 2021, when inflation was 4.2 percent. Finally, it seems like we may be getting some good news. It’s been a long wait.
So why the big monthly drop?
At the start of October, energy regulator Ofgem cut the price cap by 7.1 percent to an average of £1,834 for a typical dual-fuel household paying by direct debit.
That will feed through to a lower inflation figure.
Also, last year’s huge 27 percent energy price cap hike falls out of the annual figures.
The oil price has been falling too, dropping to $82 a barrel as markets calculate that the war in Gaza will not spread throughout the Middle East.
While the headline figure seems likely to fall, the Bank of England will also be looking closely at core inflation before deciding if it can cut interest rates.
Core inflation strips out volatile elements like energy and is often a better guide to price pressures.
This only fell slightly last month from 6.2 per cent to 6.1 percent. Markets will be hoping for a bigger fall tomorrow.
If inflation does fall to 4.8 percent tomorrow, we can expect the stock market to jump for joy.
That’s what happened today in the US as its inflation figure dropped to just 3.2 percent.
If inflation does fall as anticipated it will put an end to interest rate hikes. Soon, the BoE will have to consider cutting them instead.
This will be a huge boost for homeowners who are struggling to keep up with their mortgage payments, but bad news for savers.
Last week, the BoE’s chief economist Huw Pill said the first interest rate cut could land as soon as next August.
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Personally I’m not putting too much faith in that, having previously described the BoE as the world’s worst forecaster.
Researchers at Morgan Stanley reckon the first cut will arrive in May. By the end of 2024, base rates could have fallen to 4.25 percent, they say.
I hope they’re right.
This will help spare us a full-blown property crash and spare tens of thousands the agony of losing their homes, through no fault of their own.
Savers will be the losers, though, and best buy rates are already falling in anticipation, as I’ve been warning would happen for some time.
National Savings & Investments slashed the interest rate on its green bonds by almost a third.
However, for most of us, falling inflation and interest rates will be terrific news. So fingers crossed inflation does fall tomorrow.
