Quick Bites | UK Inflation Target in Sight

The UK was once home to the developed world’s worst inflation. Now, it is within striking distance of the central bank’s 2% target. And as the market grey heads say, “the trend is your friend”.

This matters, because it points to the nature of inflation shocks in developed economies, although of course local factors remain primary causes of rising prices. For example, wages growth, food prices and rental increases have been especially important in Australia, whereas much of the rapid price increases in the UK resulted from soaring commodity costs after supplies from Russia were cut off. In the US, strong demand from consumers “taking revenge on lockdowns” have been a big factor.

Nevertheless, many of these trends tend to be global, so worth paying attention to them. Once the energy crisis subsided, inflation pressures in the UK started to ease notably. The UK’s CPI rose by 2.3% in the 12 months to end April – the smallest gain since the summer of 2021. That is down from 3.2% in March, a plunge driven by an energy price cut that resulted in the largest annual fall in electricity and gas costs on record. Excluding energy, food, alcohol and tobacco, inflation cooled less dramatically: it was 3.9% in April by this measure, compared to 4.2% in March.

This comes as the Bank of England looks set to cut interest rates in the months ahead, though policymakers might well be distracted by the announced general election due on 4 July, which is likely to see the end of Rishi Sunak’s Conservative government.

We expect central banks to commence a rate-cutting cycle within the next few months, and that may well include the Reserve Bank of Australia.

Source: Axios