Credit, Collections & Insolvency News
Inflation has hit the Bank of England’s (BoE) target for the first time in almost three years. Prices rose at two per cent in the year to May, down from 2.3 per cent the month before, according to the Office for National Statistics (ONS)/
The figures follow a sustained period of high inflation in the UK, which peaked at 11.1 per cent in October 2022, the highest level since 1981.
The data showed that prices were up 0.3% in a month. CPI last hit 2% in July 2021 – almost three years ago. It’s dramatically down from the peak of 11.1% in October 2022.
The biggest factor pushing inflation down was food, followed by recreation and culture and household goods, and the biggest push in the opposite direction came from petrol.Core CPI inflation (stripping out energy, food, alcohol and tobacco) was 3.5%, down from 3.9% in April. The CPI services rate fell from 5.9% to 5.7%.
Steve Vaid, Chief Executive of the Money Advice Trust, the charity that runs National Debtline, said “Inflation may be falling but many households, especially those on the lowest incomes, are still under significant financial strain.
“Our National Debtline advisers continue to hear from people grappling with debts for essential costs including energy, council tax, and rent or mortgage repayments. Supporting people who are struggling with the financial fallout of the cost of living crisis needs to be a priority for the next Government.
Simon Webb, Managing Director of capital markets and LiveMore, said “Inflation has eased to 2% in May, hitting the Bank of England’s official target for the first time since July 2021. This marks a significant improvement from the inflationary pressures of the past year.”
“Core inflation, which removes food and energy prices, was also down to 4.2% from 4.4%, and plays a key part in the Monetary Policy Committee’s interest rate decisions.”
“It will be interesting to see how this impacts the Bank of England’s decision on the base rate tomorrow. The question is will it be enough to bring it down? And if it does will this be a big win for the Conservatives? Likely it will not be enough for either outcome.”
Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said “Finally reaching the target rate of 2% suggests that the Bank of England’s cautious approach to cutting interest rates is working. A year ago, this news would have been cause for celebration. So why does the mood seem so low?“
For one thing, the cost-of-living crisis is far from over, as inflation has proved frustratingly sticky. The cost of essential items and household bills are still dangerously high, and debt repayments continue to weigh on household incomes. No doubt all eyes will be fixed on tomorrow’s interest rate announcement, with many fingers crossed for a cut.
“Now more than ever, people must be proactive. With inflation at a three-year low, there is a golden opportunity for savers to lock down the best long-term savings opportunities while they last. No matter the outcome of tomorrow’s Bank of England meeting, there are clear indications that it won’t be long until interest rates follow inflation in its downward trend.”
Richard Carter, CEO of Lenvi said “Inflation hitting its target of 2% for the first time in almost three years represents a major milestone for the Bank of England and for consumers, who will have been put off making big purchases like cars or buying a house – although still having to borrow for essential costs.
“Our latest data on borrowing habits found that over a quarter of people (26%) have borrowed money to make their month-to-month costs more manageable, with 14% borrowing specifically for bills. Although it’s great to see inflation rates are heading in the right direction, the volume of people still relying on borrowing to cover basic living expenses shows an ongoing need for swift action and support in the lending sector.
“Consumers, including those looking to get a foot on the property ladder, will now be looking to the Bank of England’s interest rate decision on Thursday – where the falling inflation rate could see the UK bring forward its first cut. In anticipation of this, lenders will be acting fast to update their rates to stay competitive and win those new customers who can finally claw their way to home ownership. Continued support for our industry is still needed to ensure that vulnerable borrowers are protected across our sector.”
James Smith, Research Director at the Resolution Foundation, said “It’s very welcome to see headline CPI inflation falling back to its 2 per cent target for the first time since July 2021. And while the UK experienced a higher inflation peak during the cost-of-living crisis, it has now got back to target more quickly than either the US or euro area.
“But the legacy of a long period of very high inflation means there is unlikely to be much of a feel-good factor among families, as they continue to struggle with the higher cost of essentials.
“And while headline inflation is back to normal levels, domestically-driven services-price inflation remains elevated. This inflation will worry the Bank of England, and may give pause for thought when it comes to cutting interest rates.”
Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown said “It’s been a long time coming, but finally inflation has hit the Bank of England’s target. The last time inflation stood at 2% was in the run up to the Euros in July 2021, just before pent-up demand was unleashed while pandemic restrictions eased. As fans toast the tournament once more, seeing inflation finally return to target might be seen as a reason to put out more bunting, given how painful the cost-of-living crisis has been.
“But it doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates tomorrow. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count. There will be concerns that services inflation has only retreated slightly, so although August remains a possibility for a rate cut, September is looking more likely – and the markets are only fully pricing in a rate cut in the Autumn.
“It is clear that disinflationary pressures have been building up through the UK economy. The effect of unemployment ticking up to 4.4% in April may have made some workers more cautious in their spending patterns. That certainly showed up in the latest economic growth figures, which showed activity in the retail sectors slowing sharply. The risk is that if borrowing costs stay high through the summer, the economy may struggle to shift meaningfully out of stagnation mode.
“There are signs that more consumers are increasingly financially resilient and may be willing to spend more, helping support the economy in the months to come, especially given the big sporting events filling calendars. But longer-term investment will still be needed to provide an engine of growth.”
Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “After three years of producing the kind of wayward results you’d expect of a blindfolded darts player – on a boat – in a storm – the Bank of England finally hit the target this month.
“Falling food inflation was the most significant drop that fed into the figures, and prices were up just 1.7% in a year. It’s a world away from the high point of 19.2%, and is the result of food inflation easing for 14 consecutive months. Snack fans will be delighted to know that among the products pushing inflation down were cereal, crisps and bars of chocolate – so inflation is easing for some of our guilty pleasures.
“One notable change is that previously supermarket price drops over the past year have been for those items which move from the farm to the shelf more quickly, like dairy products. However, they are being joined by food with longer supply processes, like jams and sauces, which means price drops could spread across stores in the coming months.
“It’s worth highlighting that this doesn’t mean the squeeze on shoppers is over. Inflation is cumulative, so we’re still living with the rises of previous years – even in those instances where prices are down over the past year. Some items in the trolley are also rising at an alarming pace – thanks to troubled harvests. This includes olive oil, up 39.1% in a year and cocoa, up 19.5%.
“Inflation of recreation and culture is always quite variable, thanks to things like video games – which depend on the price points of the bestsellers. However, there are some notable movements this time outside of that. Package holidays aren’t ramping up in price quite as much as they were last year – although that owes more to a striking enthusiasm for travel this time last year than to any particular discounts. Meanwhile, the prices of pet products have actually fallen 5.1%. It begs the question of whether our lockdown dogs finally have all the pointless accessories they could ever need.
“Inflation of the price of furniture and household goods hasn’t been this low for almost 24 years – with prices falling 1.9% – driven by a drop in inflation of electrical goods. Small electrical goods prices have fallen 13.8% in a year. Supply issues for things like hoovers, fridge freezers and washing machines is easing, and demand may well be slowing too, after so many homes were packed with new white goods as part of post-lockdown renovation projects.
“Energy prices are significantly down from where they were last year, with an annual drop of 27.1%. Last month’s record energy price cut – to £1,690 – is still having an impact on the annual figure, which shows gas prices down 37.5% and electricity prices falling 21%. However, we should enjoy this while it lasts. We’ll get another cut in July to £1,568, but this is actually going to help push inflation higher, because of what was happening a year earlier. In April 2023, we had the energy price guarantee of £2,500 – so the annual cut was £810. By July 2023, the price cap was £2,074, so the annual drop is a smaller £506. It means we’ll have the weird combination of falling energy prices actually pushing inflation up.
“Petrol prices were on the rise again, pushing annual growth for the transport sector into positive territory. The average petrol price was up 0.7p per litre in a month to 148.8p per litre. Diesel was actually down 0.8p to 156.3p per litre. However, overall fuel prices were 2.3% higher than a year earlier. Within the transport category, this was partially offset by falls in second hand car prices. They were down 11.2% in a year. Demand has been unwinding for almost a year now, partly as the result of the fact that so many people bought a second-hand car in the aftermath of the pandemic, and don’t feel the need to replace it yet.
“Lower inflation isn’t likely to persuade the Bank of England policy-makers to cut rates this week, and we’re still overwhelmingly expecting them to keep rates on hold. However, over the past week, the chances of an August cut have risen.
“For anyone with a variable rate mortgage, it means another month on the edge of their seat, waiting to see if the long-awaited rate cuts finally kick in. This could come in August or September, and we’re currently expecting a couple of cuts before the end of the year. This will be a welcome change given how long people have been waiting for them, but it’s not a spectacular overnight move, so mortgages are still likely to be uncomfortably expensive for the rest of 2024. The HL Savings & Resilience Barometer shows that the average household with a mortgage now spends over a third more on essential housing costs than those who rent.
“For those who need to remortgage in the near future, things are still looking relatively miserable, and Moneyfacts figures show the average two-year fixed rate rose from 5.56% at the end of January to 5.97% this week. This is despite pricing in potential cuts later in the year, so we’re unlikely to see significant movement until the market sees more cuts on the cards.”
James Burgess, Head of Commercial and insolvency expert at Atradius said “This is the first time in almost three years that UK inflation has fallen to the Bank of England’s 2% target, representing a major milestone for the slow economic recovery and a far cry from the peak of over 11% in late 2022.”
“Businesses and consumers are now looking to the Bank of England’s interest rate decision tomorrow; the sharp fall in inflation means the UK could bring forward its first cut. We’re finally seeing signs of life in the UK economy, and this is feeding through into improvements in business health. We’ve seen rising business confidence, even if it does remain fragile.
“Our data confirms that less firms made claims for late or failed payments in May compared to April. Claims have rapidly declined in sectors such as food (-38%), textiles (-22%), and chemicals (-20%).
“That said, even if the Bank cuts rates tomorrow, businesses remain under pressure. So, it’s crucial that businesses remain vigilant and protect themselves against the domino effect of insolvency with proactive financial planning. This includes increasing liquidity, diversifying supply chains, and protecting vulnerable credit agreements with insurance.”