UK Inflation Drops to 2.3% in April: Impact on Your Finances
What is Inflation?
Inflation in simple terms is the rate of increase in prices over a given period of time. Inflation is a general measure which is often determined by the increase of prices or cost of living within a country.
looking at the UK, inflation decreased from 3.2% in March to 2.3% in April, marking its lowest level in nearly three years. We have seen inflation up as high as 9% in 2022 due to the quantitative easing measures taken after Covid.
This inflation rate, slightly above experts' forecast of 2.1%, was primarily influenced by a significant 12% reduction in the energy price cap in April. This looks like it has helped the UK over the short term to deal with the extended high inflation levels.
Although this decline brings inflation closer to the Bank of England’s (BoE) target of 2%, the higher-than-expected rate, coupled with ongoing services inflation, reduces the likelihood of a base rate cut in June.
"Within minutes of the official inflation numbers being released, market expectations for a base rate cut by the Monetary Policy Committee (MPC) next month dropped from 50/50 to just over 10%," says Danni Hewson, head of financial analysis at AJ Bell.
Why does this mean for you?
Impact of Lower Inflation on Savers
The decrease in inflation means prices are rising more slowly, which, while not ideal, is still beneficial for consumers.
With inflation at 2.3% and top savings rates around 5%, savers can outpace inflation by opting for a fixed-rate savings account, preserving their money’s value in real terms. The question is, how long will this be the case?
However, the prospect of future base rate cuts could lead to lower savings rates. This will mean that some of the opportunities to lock in fixed rates may be worth looking to take advantage of.
Impact of Lower Inflation on Homeowners
Homeowners have faced volatility in mortgage rates this year, with frequent fluctuations. Mortgage rates have gone as high as 5% in recent years which is a lot higher than the 1%-2% rates we have come accustomed to.
Mortgage rates initially fell at the end of 2023 but have since risen due to unexpected increases in US inflation, causing uncertainty about the BoE's base rate decisions.
Recently, mortgage lenders reduced rates in anticipation of a base rate cut in June. However, with today’s inflation data suggesting a delayed base rate cut, mortgage rate reductions may slow, or rates could rise.
Andrew Bailey has said “The bank of England needs to see “more evidence” that price rise has slowed but was “optimistic that things were moving in the right direction”
Conclusion
What happens with interest rates is completely out of our control. One minute, rates are skyrocketing, the next they are on the way down. The key is to build a robust financial plan to be able to withstand any changes that can occur. Speaking with a financial adviser can help guide you through the best strategy to mitigate any risk that is associated with rising interest rates and inflation
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Disclaimer: This blog post is for informational purposes and should not be considered financial advice. Always consult a financial adviser for personalised guidance.
