Rate of UK inflation tumbles to 2.3% – what does it mean for you?

The rate of UK inflation slowed to 2.3% in the twelve months to April, down from 3.2% in March. That’s according to the latest Consumer Prices Index (CPI) data from the Office for National Statistics (ONS), released at 7am this morning. 

Inflation is now within a whisker of the Bank of England’s 2% target. However, April's headline figure still came in higher than many economists were expecting. Some experts believe this could dash hopes for a June interest rate cut.

Economists polled by Reuters had expected April’s inflation reading to come in at 2.1%, before picking up again a bit later in 2024. 

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This is the first month where the new Ofgem price cap is reflected in the data. Energy prices have been falling, and the price cap was cut by 12.3% from 1 April.

We share our analysis on this morning's data. What’s next for the economy and when will the Bank of England cut interest rates? Plus, what does the latest inflation reading mean for consumers, savers and mortgage holders? 

Why has UK inflation slowed?

“Falling gas and electricity prices resulted in the largest downward contributions to the monthly change in both CPIH and CPI annual rates,” the ONS reports. 

It adds that the cost of electricity, gas and other fuels fell by 27.1% – “the largest fall on record”.  

Meanwhile, “the largest, partially offsetting, upward contribution came from motor fuels, with prices rising this year but falling a year ago.”

A big fall in April’s CPI reading was widely anticipated – and it is no surprise that lower energy prices were a big driver. 

Economists from ING Economics had forecast that April’s reading could even fall as low as 1.9%, thanks to the introduction of a new price cap at the beginning of the month.

While a big drop in the headline inflation rate is good news, it is important to note that core inflation has not slowed at quite the same rate. 

Core CPI excludes volatile measures such as energy, food, alcohol and tobacco. It is a better measure of how embedded inflation is in the economy.

Core CPI came in at 3.9% in the twelve months to April, down from 4.2% in March. 

When will interest rates fall?

All eyes were already on the Bank of England, with many savers, investors and businesses desperately hoping for a summer rate cut in either June or August. The big question now is: will April’s inflation reading be enough?

The Bank has turned more dovish in recent weeks, and governor of the Bank of England Andrew Bailey has not ruled out a June cut. 

The Monetary Policy Committee (MPC), which is responsible for setting the base rate, last met on 9 May. It decided to hold the base rate at its current level of 5.25% – however the committee was not unanimous in its decision. 

Two committee members voted for a rate cut compared with seven who voted to hold. In contrast, just one member backed a cut in April.

After May’s interest rate decision, governor Andrew Bailey expressed optimism that things were “moving in the right direction” for a rate cut. However, he also said that the Bank would need to “see more evidence” of slowing inflation before cutting rates.

Bailey stressed that the Bank would be led by the data, saying: “Before our next meeting in June, we will have two full sets of data for inflation activity and the labour market, and that will help us in making that judgement afresh. But in saying that, let me be clear. A change in Bank Rate in June is neither ruled out nor a fait accompli.”

Of course, today’s CPI figure is still a whisker above the Bank’s 2% target and, as noted by David Murray, financial planning expert at abrdn, “the final stretch to the target percent mark can prove to be a bumpy road”. 

While April's headline inflation reading saw a big drop compared to March's report, it is important to remember that it still came in slightly higher than many economists were expecting. This could dent hopes for a June cut. A poll by Reuters had suggested the rate of price increases would slow to 2.1% in April. 

What's more, services inflation remains high at 5.9%, down only 0.1% compared to last month's reading. The UK is a service-oriented economy, so the Bank of England watches this measure closely. 

Prior to today's inflation reading, experts at ING Economics had pointed out that services inflation could come in higher than expected, as April is a time where many consumers see annual price hikes on things like their phone or internet bills.

Matthew Chapman, associate partner at McKinsey & Company, thinks we may need to see “further downward movements in service inflation, real wage growth and the labour market before the narrative on monetary policy can start to change.” 

However, Tom Stevenson, investment director at Fidelity International, sounds a more optimistic note. “Inflation is nearly back on track,” he says. “That’s good news because it means the only reason for interest rates to remain at today’s restrictive level of 5.25% would be if the Bank fears that persistent wage inflation will push inflation back up again later in the year.” 

“That is not economists’ central case,” he adds. “The Office for Budget Responsibility expects inflation to remain at or below target for the next three years.”

What does slowing inflation mean for savers?

The good news for savers is that they can secure inflation-busting rates on their cash deposits. The most competitive savings accounts are currently offering rates north of 5%. 

The flipside is that the fall in the headline rate could “signal the end of bumper savings rates,” says Alice Haine, personal finance analyst at Bestinvest.

“Individuals with funds to spare have enjoyed a savings sweet spot in recent weeks with easing inflation coinciding with a time when interest rates remained high at 5.25%.” 

“But with a rate cut now imminent, lenders are likely to slash their best deals in the coming weeks and months,” she adds. 

Indeed, some of the best deals have already disappeared from the market since savings rates peaked last year – so it is worth acting now if you haven’t already. 

If you are able to lock your cash away for a longer period of time, you could consider putting your money in a one or two-year fixed rate account. That way, the interest you are earning won’t fall when the base rate is ultimately cut. 

We look at whether it is time to fix your savings in a recent MoneyWeek article. 

What does the latest inflation news mean for mortgage holders?

The latest inflation reading will be a relief to households paying off a mortgage. It signals the economy is heading in the right direction for a cut to the base rate – even if the exact timing of that cut is yet to be determined. 

Mortgage rates have soared over the past couple of years, reaching almost 7% in August 2023. They have now fallen from this peak, but remain both high and volatile.

Indeed, mortgage rates fell at the start of the year thanks to a pricing war, but they started rising again in February. 

At the end of April and beginning of May, some of the biggest lenders including NatWest, Santander and Nationwide hiked their two and five-year fixed deals. However, just a couple of weeks later (17 May), Barclays, HSBC and TSB all cut their rates slightly.

Haine says that this volatility “has not deterred buyers, who have returned to the market in droves as easing inflation and the prospect of future rate cuts improved their affordability position.” 

However, she adds that “a reduction in the headline interest rate would add even more momentum to the market – giving first-time buyers a fighting chance of being able to afford the home they want.”

It would also be good news for homeowners whose mortgage is coming up for renewal. Trade association UK Finance reports that around 1.6 million fixed-rate mortgages are due to expire at some point in 2024.

Unfortunately, most households that are remortgaging will still see their repayments go up – particularly if they are coming off a relatively cheap five-year fixed deal. However, things now look far better than they did last summer.