Inflation hits target for the first time in three years

Consumer price inflation (CPI) in the UK has finally fallen to 2% in May, marking the first time it has hit the Bank of England’s target since July 2021. This decline is a significant drop from the peak of 11.1% recorded in October 2022. While this development may seem like a cause for celebration, experts warn that interest rate cuts may not be on the horizon just yet.

Inflation drivers and impact
The main contributors to the reduction in inflation were decreases in food prices, along with lower costs in recreation, culture, and household goods. However, petrol prices continue to exert upward pressure. Core CPI inflation, which excludes energy, food, alcohol, and tobacco, also saw a decrease to 3.5% from 3.9% in April. The CPI services rate fell slightly from 5.9% to 5.7%.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, remarked, “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. 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.”

Interest rates and economic outlook
Despite the positive news on inflation, the Bank of England is not expected to reduce interest rates immediately. Streeter noted that policymakers are still wary of “hot wage inflation,” with earnings, including bonuses, running at 6%. She added, “August remains a possibility for a rate cut, but September is looking more likely – and the markets are only fully pricing in a rate cut in the Autumn.”

Paula Higgins, chief executive of the HomeOwners Alliance, urged the Bank of England to take action: “Stop holding homeowners to ransom and cut interest rates now.” Higgins highlighted the strain that high borrowing costs are placing on household finances. She pointed out that the best rate on a two-year fix this June is 4.82%, more than double the rate from June 2022. This significant increase in mortgage payments is causing considerable financial stress for many homeowners.

Human impact and future prospects
The financial strain is evident in the rising number of home repossessions and mortgage arrears. UK Finance reported 870 homes were repossessed in the first quarter of 2024, a 36% increase from the previous quarter. Additionally, 96,580 homeowner mortgages were in arrears of 2.5% or more of the outstanding balance, marking a 3% increase.

Ben Thompson, Deputy CEO at Mortgage Advice Bureau, advised those with impending mortgage renewals to act swiftly. He said, “Now is the time to get on the front foot, speak to a broker, and get mortgage ready. There are competitive deals on the market to be taken advantage of.”

Nathan Emerson, CEO of Propertymark, echoed the call for a reduction in interest rates, stating, “With inflation now back down to the levels initially targeted, Propertymark is extremely keen to see this inspire a drop in interest rates when the Bank of England Monetary Policy Committee meets tomorrow.”