Inflation has fallen to 2% for the first time in three years, reaching the target set by the Bank of England (BoE) and sparking hopes for upcoming rate cuts.
However, experts agree that the Bank of England is unlikely to act when it meets tomorrow.
The gauge may not remain at 2% for long, as core inflation, which strips out volatile food and energy prices, remained sticky. Much of the fall today has in fact been driven by the energy price cap and falling food prices, which will be a diminishing factor in future months, according to Lindsay James, investment strategist at Quilter Investors.
“This is not job done and victory declared for the Bank of England. The cost of living crisis persists and with wage inflation beginning to slow and prices in many areas of the economy still increasing faster than the headline rate, many won’t feel better off purely because inflation has hit 2%,” she said.
“This milestone being reached also does not mean a rate cut is coming tomorrow – much to the chagrin of the Conservative party. Sticky core inflation seems likely to continue giving the BoE pause for thought. As such, the tail end of the summer seems far more likely timing for the first rate cut.”
Consumers are starting to see prices drop in certain areas, such as fridge-freezers, pets and books, but there’s no escaping the fact that many prices are still rising, said Laura Suter, director of personal finance at AJ Bell.
“The cumulative effect of all the price rises, plus the big impact of increases in rent or mortgage costs and the higher personal tax burden over the past few years, mean it’s unlikely many people are feeling the benefit of inflation hitting target just yet.
“The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up. It’s highly likely the Bank will want to wait to see the outcome of the election and the final economic plans before making that first cut. With no meeting in July, that means all eyes are now firmly on the August MPC meeting for our first potential cut to rates.”
But with prices still growing too quickly in the services sector, Zara Nokes, global market analyst at JPMorgan Asset Management, believes that even an August cut is unlikely.
“Today’s inflation news puts the final nail in the coffin for any hopes of a rate cut from the Bank of England tomorrow,” she said.
“Services inflation is still running too hot, coming in at 5.7% year on year – significantly above the Bank of England’s latest projection of 5.3%. If this stickiness in domestic price pressures continues, alongside ongoing resilience in economic activity, an August rate cut could well be off the table too.”