Inflation falls to 8.7% – credit industry reaction

25th May 2023

Figures released by the Office for National Statistics on Wednesday show that UK inflation, as measured by the consumer prices index (CPI), came in at 8.7% for April, down from March’s 10.1% but far above the 8.4% hoped for by the Bank of England. The news sent expectations of further interest rate rises soaring and pushed the yield on two-year gilts up 0.24 percentage points to 4.37% – close to the levels seen last year when Liz Truss’s unfunded tax cuts rattled financial markets.

Commenting on the figures Richard Lane, Director of External Affairs at StepChange, said “The sharp fall in inflation today is welcome news after over a year of soaring prices for essentials. Yet while inflation is moving in the right direction, the price of food in particular remains alarmingly high, and households are unlikely to see any difference in their already stretched budgets.”

“We’re now seeing the real impact of the cost of living crisis on our services, with demand for debt advice at its highest for more than three years. Arrears across household bills are a particular pressure point for our clients, with more than half (55%) of new clients in arrears on their dual fuel bills.”

“The government must acknowledge the millions of households who will continue to struggle to put food on the table and cover their essential household costs, despite the overall level of inflation going down. To prevent widespread financial hardship, a start would be to pause punitive deductions from benefits to help those on the lowest incomes through this difficult period. We’d also like to see targeted funding to write-off energy arrears for households who simply cannot afford to pay. In the longer term, a social tariff for energy would act as a permanent solution to protect financially vulnerable households from debt and fuel poverty.”

Andy Mielczarek, Founder and CEO of SmartSave Bank, a Chetwood Financial company, said “Although today’s figures show that efforts to reduce inflation are finally bearing some fruit, the cost-of-living crisis isn’t over yet. Underlying price pressures in the economy show little sign of improvement, and despite inflation’s drop into single digits, this means that consumers will continue to be impacted by high costs. Yet this environment remains great for those able to save, as long as they’re saving in the right place.”

“In the current climate, the majority of easy-access savings accounts will not be able to keep pace with inflation, meaning that a significant number of people are seeing their money losing value in real terms. Worse still, our research shows that a worrying percentage (97%) of the UK’s savers are relying on current accounts alone to house their money, while uptake for different savings products – from ISAs to fixed-rate bonds – is low across the board.”

“Even though pressures on the economy are gradually easing, it’s vital that people in a position to put money away each month are proactive about how they are managing their savings to beat inflation. For those looking to deposit a lump sum, fixed-term, fixed-rate bonds can be a good option when it comes to accessing higher interest rates, while many people could also benefit from exploring their options beyond the savings accounts offered by high-street banks.”

Sarah Coles, Head of Personal Finance at Hargreaves Lansdown said “Power price cuts have dialled down inflation. In April, CPI finally dropped into single digits for the first time since last September. But this doesn’t mean we can afford to relax. Our wallets aren’t under any less pressure than they were last month. With one or two exceptions – including petrol – prices are still rising horribly – and inflation is actually up 1.2% from March. The fall in the annual CPI figure isn’t a sign of widespread price cuts: it comes down how it’s calculated.”

“Fortunately, there is some hope for the future. Falling petrol prices and lower wholesale energy prices will eventually feed into prices elsewhere. This isn’t just about filling up the car or heating our homes. Fuel powers the price of anything that is manufactured, transported or sold. Once it has time to feed into the system, we can expect to see more prices fall. Similarly, reductions in the wholesale cost of food has made a very small dent in prices, and should start to make a real difference at the supermarket till over the next 3-9 months.”

“The jury is out over how far and how fast inflation will fall, and there are still concerns that wage rises will feed higher prices. However, the Bank of England thinks inflation will drop from here, and will be closer to 5% by the end of 2023.”

“The Bank of England knew this was coming, and why, so it’s not going to get over-excited at the prospect of falling inflation. It’s also likely to have an eye on core CPI  – which actually rose from 6.2% to 6.8% – the highest it has been since 1992. The fact this is on the way up is likely to fuel expectations of a rate rise when the Bank meets next month.”

“The fall in inflation owes a huge amount to energy prices – but far less to prices today than to those last April. Back then, the energy price cap was hiked by an eye-watering 54%, which has been part of the inflation equation ever since. This fell out of the figures in April, to be replaced with the change in energy prices this April – which didn’t budge an inch, thanks to the energy price guarantee. As a result, the inflation measure is lower. However, when you translate this into bills, things are actually harder now than they were a year ago. Electricity is up 17.3% in a year and gas 36.2% – which is not an insignificant rise.”

“Petrol prices eased again, falling 1.3% during the month – taking us to 145.8p for petrol and 162.4p for diesel, as the threat of global recession meant less demand for oil. It means annual price rises are now down 9.9% in a year for petrol and 7.8% for diesel. Compare this to last January when they were up an astonishing 42.9% in a year. Oil price movements tend to be dragged all over the place by sentiment and fluctuations in demand and supply, so there’s always the chance of another spike. However, in the period since the April figure was measured, economic uncertainty has pushed it lower, so we’re expecting more of the same in the May figures.”

“Food price inflation is still running at a painful 19% – although this is down very fractionally from 19.1% in March. Among the most hair-raising increases was sugar at 47.4%, olive oil at 46.4%, eggs at 37% and low-fat milk at 33.5%”

“We have seen some price cuts in recent weeks – including milk, butter and bread. Low-fat milk may be up 33.5% in a year, but it’s not quite as bad as back in October when it was up 47.9%. For dairy products, part of the relief has come from people cutting back as prices rose, which caused a glut and allowed supermarkets to cut costs. And it’s not the only wholesale price to have come down. In some cases this can be passed on relatively quickly, but in an awful lot of cases it takes far longer. It means we’re going to have a tough few months before we see much movement.”

“For anyone with a variable rate mortgage, the likelihood that the Bank of England will need to raise rates again means another unwelcome hike could be on the way. The price of new fixed deals, meanwhile, hasn’t moved terribly far in the past three months. Expectations that rates will go slightly higher than had been expected, and last slightly longer than previously thought, are pulling fixed mortgage rates up. Meanwhile, longer-term expectations of rate falls are pushing in the opposite direction. As we get further through 2023, and move towards expectations of interest rate cuts in 2024, we’re likely to see those mortgage rates start to fall again.”

“Your decision whether or not to fix, and if so, for how long, will depend on your priorities. If you fix now, you’re likely to see rates fall as we get closer to the end of the year. However, you may well be on a higher variable rate while you wait, so there’s a cost involved – and we still don’t know how long we’ll have to wait for those cuts – or how low they’ll go. Some borrowers will be happy to stick with a variable rate, because they don’t want to fix for what could turn out to be a relatively punchy rate. Others may feel that rates have fallen far enough from the peak to make it worth fixing in return for certainty.”

Simon Webb, Managing Director of capital markets and finance at LiveMore said High energy prices have played a big part in soaring inflation but that is now falling as are fuel costs. Hopefully, this is the start of inflation heading downwards towards the 2% target although high food prices may make is a slow journey.”

“The big question is whether this fall in inflation is enough to stave off another base rate rise. Two out of the nine members of the Monetary Policy Committee voted for not increasing base rate at the last meeting so there is certainly appetite for no more rises.”

“Of course, inflation is not the only consideration for setting base rate as the wider economic situation and cost of living crisis comes into play. Borrowers on tracker rates don’t want to see their monthly repayments go up yet again and UK Finance recently reported a rise in arrears and repossessions – clear evidence that more people are struggling.”