For the first time in three years, UK inflation has reached the Bank of England’s 2% target, offering a significant boost to the economy and providing a positive outlook for those considering bridging loans. This milestone marks a turning point after a prolonged period of inflationary pressures and economic uncertainty.
Inflation hitting the target is a crucial development for the financial sector, especially for bridging loans. Bridging loans, which are short-term financing options typically used to bridge the gap between transactions, can be heavily impacted by inflation rates. Lower inflation contributes to a more stable economic environment, reducing the costs associated with borrowing.
Lower Interest Rates: With inflation under control, the Bank of England is less likely to increase interest rates, which can make bridging loans more affordable for borrowers. Stable interest rates mean lower repayment costs over the loan term.
Increased Lending Confidence: Financial institutions are more willing to lend in a stable economic climate. This increased confidence can lead to more favourable loan terms and conditions for borrowers.
Improved Market Conditions: A drop in inflation can stimulate economic growth, leading to better market conditions. This is beneficial for those using bridging loans for property transactions, as it can result in higher property values and quicker sales.
The Office for National Statistics reported that the May CPI growth rate aligns with economists’ forecasts, driven by reductions in food, non-alcoholic beverages, and furniture prices. However, services inflation remains a concern, indicating that while headline inflation is at target, the battle against inflation is ongoing.
Prime Minister Rishi Sunak has highlighted the positive impact of reaching the inflation target, noting it as “very good news” during a challenging period. The Conservative party views this achievement as a step towards easing the cost of living pressures on households.
The announcement of the inflation rate saw Sterling rise by 0.15%, reflecting market optimism. Investors have adjusted their expectations for interest rate cuts, now placing a lower probability on significant rate reductions in the near term. This cautious optimism is mirrored by senior BoE officials who suggest that if services inflation aligns with forecasts, rate cuts could be feasible later in the year.
Economists warn that the drop in headline CPI inflation might be temporary, with potential rebounds later in the year. However, for now, the lower inflation rate provides a more favourable environment for those considering bridging loans, supporting more stable financial planning and investment opportunities.
The recent drop in UK inflation to the Bank of England’s 2% target is a promising sign for the economy and a boon for the bridging loan market. Borrowers can benefit from lower interest rates, increased lending confidence, and improved market conditions. As the economic landscape continues to evolve, maintaining stable inflation will be key to sustaining these benefits and fostering a healthy financial environment for all.
Annual CPI inflation was 2.3% in April 2024, down from 3.2% in March. This drop was due to the high March 2023 figure of 1.21% being replaced by a new March 2024 rate of 0.3%. The month-on-month rate of 0.3%, equivalent to an annualized 3.6%, was impacted by the Ofgem price cap reduction. Without this reduction, contributing -0.3 percentage points, inflation would have been higher. This indicates persistent inflation in the wider economy, especially given the high month-on-month rates of 0.6% in February and March, equivalent to over 7% annually. Netting out the Ofgem effect, April's month-on-month inflation would have been around 0.6%, with a headline closer to 2.6%.
Measures of underlying inflation are a better guide to the longer-term outlook, and these are falling now: annual CPI inflation in services is slightly down to 5.9 per cent from 6.0 per cent in the previous month and core CPI (excluding Food and Energy) inflation is down to 3.7 per cent from the previous month’s 4.2 per cent. NIESR’s trimmed mean measure of core inflation is also down to 2.5 per cent from 3.7 per cent in March. Furthermore, the latest wage data covering January to March 2024 came in at 6 per cent, confirming that persistence in pay growth pressures that may continue to keep services inflation high. Indeed, the current inflation is a story of high service inflation combined with low or negative goods price inflation (annual goods price inflation was -0.8 percent in the year to April 2024).
| Housing & household services | -0.45 percentage points |
| Alcohol & tobacco | -0.16 percentage points |
| Food & non-alcoholic beverages | -0.14 percentage points |
| Recreation and culture | -0.12 percentage points |
| Communication | -0.08 percentage points |
| Restaurants and hotels | 0.03 percentage points |
| Misc goods and services | 0.02 percentage points |
We can see our old story of the ‘Blue team’ pulling inflation down across almost all sectors as last year’s high figures drop out, whilst the ‘Brown team’ is positive in most sectors, with the big exception being Housing and Household services which includes domestic energy. Here the size of the Ofgem price-cap reduction impact comes in at -0.3 per cent. So, the overall month-on-month figure of 0.3 per cent is coming from all sectors, with big contributions in Transport (0.24 pp), Communications (0.11 pp) and Restaurants and Hotels (0.1 pp). Food and Non-Alcoholic beverages prices continue to increase, contributing 0.04 pp to the new inflation.
Out of over 700 types of goods and services sampled by the ONS, there is a great diversity in how their prices behave. Each month some go up, and some go down. Looking at the extremes, for this month, the top ten items with the highest monthly inflation are:
| Golf green fees | 44.99 |
| Electric cooling fan - seasonal | 33.46 |
| Ebooks | 28.11 |
| Music downloads | 24.99 |
| Euro tunnel fees | 24.53 |
| Printer | 21.38 |
| Electric razor | 19.37 |
| Admission to cultural event | 17.68 |
| Computer games | 16.12 |
| Letter handling services | 15.35 |
The ten items with the highest negative inflation this month are shown in Table 2.
| Laptop computers | -7.52 |
| Computer software | -8.17 |
| Electricity | -10.23 |
| Mobile phone applications | -10.80 |
| Fabric conditioner 500ml - 1.5lt | -10.90 |
| Patio table & chairs - seasonal | -11.09 |
| Computer game | -12.89 |
| Gas | -16.13 |
| Computer game downloads | -21.45 |
| Smart speaker | -36.87 |
In both these tables we look at how much the item price-index for this month has increased since the previous month, expressed as a percentage.
We can look ahead over the next 12 months to see how inflation might evolve as the recent inflation “drops out” as we move forward month by month. Each month, the new inflation enters the annual figure and the old inflation from the same month in the previous year “drops out”.[1] Previously we ended the “low inflation” scenario but have reintroduced it in response to some recent months with near zero month-on-month inflation. We have also dropped the “High inflation persistence” scenario as it now looks unlikely unless geopolitical factors deteriorate significantly. We depict the following scenarios for future inflation dropping in:
The “low” scenario assumes inflation each month is equivalent to 1 per cent per annum (0.08 per cent pcm).
The “medium” scenario assumes that the new inflation each month is equivalent to what would give us 2 per cent per annum or 0.17 per cent per calendar month (pcm) – which is both the Bank of England’s target and the long-run average for the last 25 years.
The “high” scenario assumes that the new inflation each month is equivalent to 3 per cent per annum (0.25 per cent pcm). This is now the central forecast.
The “very high” scenario assumes that the new inflation each month is equivalent to 5 per cent per annum (0.4 per cent pcm). This reflects the inflationary experience of the United Kingdom in 1988-1992 (when mean monthly inflation was 0.45 per cent).
Previously we have followed the “very high” or “high” scenarios. We still think that the new figures are likely to come in on average somewhere between the two in the coming months.
The latest ONS data (covering the three months to March 2024) suggest that wages are growing at 6 per cent (excluding bonuses). That is, wage growth remains high as wages continue to catch up with past inflation. We can expect this to continue and put upward pressure on prices, particularly in the service sector. The inflation rate in services remains high at 5.9 per cent but is falling, whilst core inflation (excluding food and energy) has dropped to 3.9 per cent. These factors indicate that inflationary pressures are likely to persist well into 2024. However, the dropping out of the high inflation rates from 2023 will tend to dominate and drive down headline inflation for the first half of 2024 despite these persistent inflationary pressures. On a more optimistic note, today’s NIESR trimmed mean inflation measure has fallen significantly to 2.5 per cent.
The fact that the new inflation was high despite the Ofgem effect has raised our forecast for inflation as we move forward compared to last-months expectations. We still believe the most likely outcome lies between the high and very-high scenarios, and this means that inflation in May will be 1.8-2.1 per cent where it will bottom out before creeping up again. If we follow the high and very high scenarios, inflation will be in the range of 3-4 per cent by December 2024 with a clear upward trajectory through 2024. However, if month-on-month inflation comes in with low or medium figures, the range will be of 1.6-2.3 per cent by December, which shows inflation has stabilised around target.
This forecast assumes that geopolitical tensions do not deteriorate. Direct conflict between Russia and NATO would rapidly worsen the picture for inflation. Looking East, if the rising tensions between the United States and China lead to an intensification of the trade war or even open military conflict in the South China Sea or Republic of China (Taiwan), world supply chains would be disrupted, and inflation significantly raised, to levels far higher than seen in 2022. The Middle East remains a potential source of uncertainty, although the recent exchanges in April between Israel and Iran do not seem to have escalated as of now.
Bank of England have raised interest rates over the past couple of years to help slow down price rises (inflation). It’s working. A positive economic shift has seen Inflation decrease in the UK to its lowest level since September 2021, from a peak of 11% in 2022 to 3.2% in March.
High inflation affects everyone, but it particularly hurts those who can least afford it. The BOE need to make sure that inflation comes down to 2% and stays there.
The progress we are seeing in the key economic data is encouraging, but we are not yet at the point of cutting interest rates. We need to see more evidence that inflation will stay low before we can do that.
Our job is to make sure that inflation returns to our 2% target.
We’ve been using higher interest rates for the past couple of years to help slow down price rises.
Higher interest rates are working. Inflation in the UK has fallen to its lowest level since September 2021, from a peak of 11% in 2022 to 3.2% in March.
Higher interest rates work by making it more expensive for people to borrow money and encouraging them to save. That means that, overall, they will tend to spend less. If people on the whole spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.
We know this means that many people are facing higher borrowing costs. But high inflation that lasts for a long time makes things worse for everyone.
Inflation is still above our 2% target. Petrol and utility prices have fallen since 2022, and some other prices are now rising much more slowly, including food prices. But prices of services – for example hotels and restaurants, insurance and rents – are still rising at rates well above past averages.
Lower oil and gas prices mean that inflation is likely to drop to around 2% in coming months before rising slightly in the second half of the year. It should then settle back down again.
We can’t rule out more global shocks that keep inflation high though. For example, developments in the Middle East could increase inflation by causing oil prices to rise.
Progress is encouraging, but we are not yet at the point of cutting interest rates.
We are holding interest rates steady at 5.25%.
This will help to make sure that inflation gets back to the 2% target and stays there.
The progress we are seeing in the key economic data is encouraging, but we are not yet at the point of cutting interest rates. We need to see more evidence that inflation will stay low before we can do that.
We have held interest rates at 5.25% to help inflation return to our 2% target.
Bank of England Monetary Policy
