RISHI SUNAK yesterday finally got some good news: Inflation fell sharply from four 4 per cent to 3.4 per cent in February, the lowest level in two years.
The crisis began during the pandemic, when lockdowns and Covid restrictions resulted in shipping containers being stuck at sea and caused huge supply chain chaos. As shipping costs soared, companies began to pass on these to shoppers.
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The inflation pain got worse when Russia invaded Ukraine and triggered soaring energy prices.
So what does the fall mean for our pockets . . .
Q: HAS the beast of inflation finally been tamed? Its rapid drop to 3.4 per cent from 10.4 per cent last February marks the fastest 12-month fall since 1978. So it’s fair to say the beast has been tamed and muzzled.
But it hasn’t stopped growling just yet — we aren’t any richer, things are simply getting more expensive less quickly.
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At 3.4 per cent, the level is still above the 2 per cent target the Bank of England has set out.
However, economists at think tank the Resolution Foundation have said if the rate of price falls keeps slowing, inflation should drop to that golden 2 per cent figure by next month. This could give the Bank more confidence to cut rates.
Q: What is behind the latest fall? Falling hotel and restaurant prices and cheaper groceries helped bring down the rate.
Q: Does this mean that my bills are finally going to start reducing? Energy bills, which are set by Ofgem, are lower than a year ago, as is petrol and diesel at the pumps.
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But you might see other bills still rising and some groceries, including olive oil and chocolate, are increasing.
Mortgage costs have jumped on the back of higher interest rates and rents are rising at record pace, up by 6.2 per cent in the 12 months to January 2024.
What is the Bank of England base rate and how does it affect me?
In addition, residential care home costs have risen, with the average weekly fee up 19 per cent from 2021/22.
Though inflation is falling, we are not in deflation — a sustained decrease in the price of goods and services — yet. So overall we will probably have bigger outgoings than last year.
Q: So is anything actually getting cheaper? Some dairy products which jumped in price a year ago are now going down.
Security tags on packs of Lurpak signalled the start of the cost-of-living crisis, but now tubs of butter are falling in price by nine per cent.
Some dairy products which jumped in price a year ago are now going down
Pasta, which also shot up after Russia invaded Ukraine because both countries produce so much wheat, has also fallen in price as supply chains have been bolstered.
Q: What does this mean for family finances in general? Shoppers have been savvy and cushioned themselves from the full whack of inflation by switching to discounters and cheaper own brands.
According to MoneySupermarket’s latest index, households’ regular outgoings, such as insurance, mortgage and groceries, have fallen by an average of £62.20 over the past three months.
However, this could also mean households have stopped paying or cancelled subscriptions.
A recent report from sofa chain DFS showed we are putting off making big purchases. And according to Which? some households are missing payments on credit card or energy bills in order to keep up with mortgage repayments.
Q: Are interest rates linked to inflation? The reason the UK has been hit with 14 interest rate hikes in a row is because the Bank is attempting to bring down inflation.
Higher interest rates make borrowing more expensive, and are therefore meant to depress spending and encourage saving.
The idea is that a subdued environment should limit companies’ ability to hike prices, because people won’t be able to afford them.
Q: Does this mean rates will come down again soon? What does that mean for my mortgage? The Bank is expected to keep interest rates at the current 5.25 per cent today because its team of rate setters want more confidence that this path of falling inflation will continue.
They are nervous that some big wage rises by top companies could push prices higher again. But economists believe the Bank could cut interest rates within the next three months, with the next meeting due in May.
Governor Andrew Bailey has said it doesn’t have to wait for inflation to hit 2 per cent, only to look like it is on the path to get there.
There is the risk that if the Bank delays cutting interest rates, it could squeeze businesses and households too hard.
Mortgage rates are already coming down, with NatWest slashing home loan costs yesterday.
This is because high street banks have more confidence that inflation is falling, so the Bank is likely to lower the base rate soon.
Q: What about the economy, will we get some growth at last? We are already bouncing out of a short recession, but growth has been hovering around the zero mark.
Inflation has made it harder for the economy to grow because the rising cost of goods has taken great chunks out of our wallets.
People have had to cut back because they can’t afford what they used to buy and businesses have reined in investing because interest rates have made the cost of borrowing too high.
If there is more confidence that inflation will come down then people and companies will start spending again, which should boost the economy.
Mortgage rates are already coming down, with NatWest slashing home loan costs
Q: What does all this mean for Rishi? One of the Prime Minister’s five pledges was to halve inflation, and he has more than done that.
The problem is people are still feeling hard up, the price of goods is still expensive and the Bank’s higher interest rates arguably had a bigger hand in bringing down inflation than any government policy.
But after a grim ten days for the PM — full of plotting and internal rows — it is a much-needed boost.
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He can say his plan is working and people should start to feel a difference as wages are still rising, mortgage rates are falling and free childcare will be extended, which should encourage more people into work.
The hope is an improved economy means he can afford another round of tax cuts before the election.
