In a significant milestone for the British economy, the Office for National Statistics confirmed this morning that inflation has fallen to the Bank of England's 2% target for the first time in nearly three years. The drop from 3.2% in March marks a dramatic easing of price pressures, fueled by falling energy costs and a slowdown in food price rises. The data, released at 7am, sent the pound sliding against the dollar as markets priced in a near-certain interest rate cut in August.
Chancellor Rachel Reeves called it a “welcome relief for families,” but warned that “prices are still high in the shops.” The ONS figures show core inflation, which strips out volatile food and energy, fell to 3.5% from 4.2%. Services inflation, a key gauge of domestic price pressures, dropped to 5.7% from 6%. That remains well above the Bank’s comfort zone but is heading in the right direction.
Economists at Capital Economics said the data “opens the door” for the first rate cut since March 2020. The Bank’s Monetary Policy Committee meets next week, but most analysts expect them to hold rates at 5.25% until August. Governor Andrew Bailey welcomed the fall but cautioned that “we are not out of the woods yet.”
Labour unions and business groups were quick to seize on the news. The TUC said the government must now “deliver a pay rise for public sector workers,” while the CBI called for “decisive action to unlock investment.” The prime minister’s spokesman said the government was “committed to halving inflation” but refused to comment on rate decisions.
The road to 2% has been bumpy. Inflation peaked at 11.1% in October 2022 after Russia’s invasion of Ukraine sent energy prices soaring. Since then, the Bank has raised rates 14 times, crushing demand but also pushing up mortgage costs for millions. Today’s figure will be a relief for homeowners on tracker deals, who have seen their monthly payments soar.
Yet the cost of living crisis is far from over. Food prices are still 25% higher than two years ago. Rents are rising at their fastest pace on record. And the Bank’s own forecast suggests inflation may tick up again later this year as energy prices stabilise. But for now, the summer of 2024 looks set to bring the first rate cut in four years.
Markets are pricing in two quarter-point cuts by Christmas, which would bring the base rate to 4.75%. That would still be high by historical standards, but it would soften the blow for borrowers. Savers, however, face a different picture: easy-access accounts are already offering less than 4%, and a rate cut will push them lower.
The ONS report also revealed that the biggest downward contributions came from gas, electricity, and motor fuels. Ofgem’s price cap fell by 15% in April, dragging energy costs down. Food inflation eased to 2.4%, the lowest since November 2021. But prices for services, such as restaurants and hotels, rose by 5.7%, reflecting sticky wage pressures.
The Bank’s decision next week will be finely balanced. Hawks worry that services inflation is still too high. Doves point to the fragile economy and weak consumer confidence. The labour market is cooling, with unemployment rising and vacancies falling. The prime minister’s promise to “grow the economy” will be harder to deliver if rates stay high.
For now, the headline number is good news. But the detail is more nuanced. Inflation at 2% is a milestone, not a destination.
