Prices started to rise two years ago, but the Bank of England infamously claimed that the upward trend would be “transient”. It wasn’t long before BoE governor Andrew Bailey had egg on his face because inflation was more than a passing phase.
Shortages caused by the pandemic and the subsequent energy price shock triggered by Russia’s invasion of Ukraine sent prices skyrocketing.
The official consumer price index (CPI) peaked at 11.1 percent in October last year, plunging the country into a brutal cost-of-living crisis.
Basics rose at a much faster pace than that, with household energy bills doubling and food prices up 20 percent.
This forced the ECB to raise interest rates for 14 consecutive meetings, to today’s level of 5.25 percent.
Inflation has eased this year but the fall has been painfully slow.
Prices still rose 6.7 percent in the year to September, well below Prime Minister Rishi Sunak’s target of holding it to 5 percent by the end of the year.
The October figure is published tomorrow morning and City economists and analysts expect inflation to have fallen to just 4.8 per cent. That’s a drop of almost two full percentage points in one month.
That was the lowest reading since October 2021, when inflation was 4.2 percent. Finally, it looks like we’re getting some good news. It’s a long wait.
So why the big monthly drop?
At the start of October, energy regulator Ofgem cut the price cap by 7.1 per cent to an average of £1,834 for a typical dual fuel household paying through direct debit.
That will contribute to a lower inflation figure.
Also, last year’s big energy price cap hike of 27 percent fell short of the annual figures.
The price of oil is also falling, falling to $82 a barrel as markets calculate that the war in Gaza will not spread across the Middle East.
Although the headline figure looks set to fall, the Bank of England will also be watching core inflation closely before deciding whether to cut interest rates.
Core inflation destroys volatile elements such as energy and is often a better guide to price pressures.
This fell only slightly last month from 6.2 per cent to 6.1 per cent. The markets will expect to fall more tomorrow.
If inflation drops to 4.8 percent tomorrow, we can expect the stock market to go wild.
That’s what happened today in the United States as the inflation figure fell to just 3.2 percent.
If inflation falls as expected it will put an end to interest rate hikes. Soon, the BoE will have to consider cutting them instead.
This will be a huge boost for homeowners struggling to keep up with their mortgage payments, but bad news for savers.
Last week, the BoE’s chief economist, Huw Pill, said the first interest rate cut could come as early as next August.
READ MORE: Inflation fueled by key No10 policies, Bank of England official warns
Personally I’m not putting too much faith in that, having described the BoE as the world’s worst forecaster.
Researchers at Morgan Stanley estimate that the first cut will come in May. By the end of 2024, prime rates could have fallen to 4.25 percent, they say.
I hope they are right.
This will help us avoid a full blown real estate crash and save thousands the pain of losing their homes through no fault of their own.
Savers will be the losers, however, and best purchase rates are already falling in anticipation, as I have warned would happen for some time.
National Savings & Investments has cut the interest rate on its green bonds by almost a third.
However, for most of us, the fall in inflation and interest rates will be great news. So inflation crossed fingers will fall tomorrow.
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