That concludes our preview analysis for today, but we will be back tomorrow morning before the inflation news breaks at 7.00am. Join us then.
How does inflation affect your cash savings?
With tomorrow’s inflation figures expected to be the highest that the UK has seen in over a year, now is a good time to assess whether your cash savings are doing enough.
Inflation eats away at the purchasing power of your money – as prices rise, your money will not stretch as far as it did before. That’s why it is important to make sure it is growing in one of the best savings accounts.
While you may think this won’t affect you, it is still worth checking.
Recent research from Paragon Bank revealed that 55% of the UK population has money languishing in low-interest savings accounts, with billions of pounds being eroded by inflation.
For example, if inflation was at the Bank of England’s target of 2% and your money was held in a current account accumulating no interest, then your cash would be 2% less powerful.
However, if you instead put that money into a savings account that yielded 2% interest, your money would keep pace with inflation, keeping your purchasing power the same.
Don’t be content with just matching inflation. After a period of high interest rates, many savings accounts offer inflation-busting rates.
The best cash ISA on the market right now, Moneybox’s cash ISA, can grow your savings by 5.71%. When you subtract last month’s inflation reading of 2.6% from this figure, you are left with a real return of 3.11%.
– Daniel Hilton, junior writer
What could April’s tax changes mean for inflation?
One thing economists will be watching over the coming months is the impact of recent tax changes on the inflation data.
Chancellor Rachel Reeves raised the rate of employer National Insurance contributions in her Autumn Budget last year. She also lowered the threshold at which employers begin paying the tax. These changes came into effect at the start of the new tax year in April.
A survey of 52 leading retailers, conducted by the British Retail Consortium (BRC) earlier this year, showed two-thirds of businesses were considering raising prices to help offset the cost of the changes.
“Retailers have worked hard to shield their customers from higher costs, but with slow market growth and margins already stretched thin, it is inevitable that consumers will bear some of the burden. The majority of retailers have little choice but to raise prices in response to these increased costs,” said Helen Dickinson, BRC chief executive.
Huw Pill on “the courage not to act”
The Bank of England’s chief economist Huw Pill sounded a more cautious tone in a speech delivered before Barclays today.
He expressed the view that rate cuts have been coming “a little too fast of late”, and defended his “hold” vote earlier this month by talking about “the courage not to act”.
Pill still believes the disinflationary process is intact, but favours a more gradual pace of cuts.
“I am concerned about the potential inflationary impact of structural changes in price and wage-setting behaviour, following the experience of prolonged, well above-target inflation in recent years,” he said.
This could potentially include workers continuing to demand higher pay, or companies continuing to hike prices for longer.
Against this backdrop, Pill believes the quarterly pace of rate cuts we have seen since last summer is too rapid.
ING: “April is always a crazy month for UK inflation”
The economists at financial institution ING think the Bank of England can relax.
UK economist James Smith points out that “April is always a crazy month for UK inflation” because of the annual bill hikes that take place. When you put this to one side, pricing power more generally “seems to be fading”.
“We think the news on services inflation is about to get better. We believe it will be half a percentage point lower by June (roughly 4.2%), well below the BoE’s forecasts, which see it hovering around 5% into the summer,” he added.
This drop will be partly linked to slower rental growth, in ING’s view.
ING also points out that services inflation looks much better when you strip out volatile categories like airfares, holidays and rents. This underlying measure, which ING terms “core services inflation”, is “already tracking at 4% and is likely to head lower over the next few months”, Smith said.
As we established in a previous post, services inflation is an important metric for the Bank of England, because services make up around 80% of the UK economy.
Against this backdrop, ING thinks the Bank could end up cutting rates to a lower level than the market currently anticipates. “Markets are pricing the terminal rate at 3.7%,” Smith said. “We're expecting rates to eventually fall to 3.25%.”
What about core and services inflation?
The headline rate of CPI inflation is the most commonly-reported metric, but the Bank of England also keeps a close eye on core and services inflation.
- Core CPI excludes volatile measures such as energy, food, alcohol and tobacco. It can give a better sense of how embedded inflation is in the economy.
- Services inflation tells you how much things like educational costs, hospitality costs, and recreational costs have gone up or down. Around 80% of the UK economy is made up of services.
Deutsche Bank thinks core CPI will jump to 3.7%, up from 3.4% last month. It thinks services CPI will rise to 4.9%, up from 4.7%.
“Biggest test for the MPC so far this year”
“After an encouraging March report, the April inflation reading will present the biggest test for the MPC so far this year,” said Sanjay Raja, chief UK economist at Deutsche Bank. April’s bill hikes are likely to have pushed the overall inflation rate higher, as well as a later-than-usual Easter weekend. The biggest test will come from elsewhere, though.
The Bank will be watching to see “how the double whammy of the National Living Wage and employer National Insurance Contributions impact price momentum”, Raja said. “We think food, core goods and some services (particularly hospitality and leisure) will be most impacted.”
The MPC met earlier this month and voted to cut interest rates by 25 basis points on 8 May. A consecutive cut at next month’s meeting in June currently looks unlikely.
April’s inflation figures due tomorrow
Good afternoon and welcome to our live blog. April’s inflation data will be published tomorrow morning at 7.00am. Brace yourself for a significant jump. The Bank of England thinks the headline rate will rise to 3.4%, up from 2.6% last month.
This would be the fastest rate of annual CPI inflation in over a year. The last time the inflation rate was this high was in February 2024. The good news is that it is expected to be short-lived.
In its latest monetary policy summary, the Bank of England said that “previous increases in energy prices” were “likely to drive up CPI inflation from April onwards”, but that it was “expected to fall back thereafter”.
By this time next year (Q2 2026), the Bank expects inflation to have fallen back to around 2.4%. By the second quarter of 2027, it expects it to be 1.9%. This is below the all-important 2% target.