‘UK inflation flips from embarrassment to leadership’ – experts comment

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company, said: “Finally reaching the target rate of 2% suggests that the Bank of England’s cautious approach to cutting interest rates is working. A year ago, this news would have been cause for celebration. So why does the mood seem so low?“

For one thing, the cost-of-living crisis is far from over, as inflation has proved frustratingly sticky. The cost of essential items and household bills are still dangerously high, and debt repayments continue to weigh on household incomes. No doubt all eyes will be fixed on tomorrow’s interest rate announcement, with many fingers crossed for a cut.

“Now more than ever, people must be proactive. With inflation at a three-year low, there is a golden opportunity for savers to lock down the best long-term savings opportunities while they last.  No matter the outcome of tomorrow’s Bank of England meeting, there are clear indications that it won’t be long until interest rates follow inflation in its downward trend.”
 
Lily Megson, Policy Director at My Pension Expert, said: “With just 15 days until the election, the government will no doubt claim the slowdown in inflation as a victory. But it’s too little, too late for Rishi Sunak. The return to the Bank of England’s 2% target is a positive development, but it cannot erase the prolonged financial hardship faced by many households.

“Following last month’s dip in inflation, the Prime Minister claimed it was proof that the plan is working. But the government must recognise that today’s figures do not signal the end of people’s fight for financial security. Pension poverty, for example, is on the rise. The cost-of-living crisis has made it incredibly challenging for individuals to contribute to their pension pots, leading many towards a difficult, delayed or unattainable retirement.

“The next government will have its work cut out. With inflation back at manageable levels, now is the time to help people get back on the path to recovery. Prioritising financial education and ensuring accessible advice for all will be essential. This approach will not only empower people to take control of their financial futures, but also ensures that everyone benefits from any economic recovery over the coming months.”
 
Rob Morgan, Chief Investment Analyst at Charles Stanley, comments: “UK CPI inflation fell to the Bank of England’s 2% target in May, down from a previous 2.3% in April, as higher interest rates continue to take effect.

“It’s the lowest reading of inflation for almost three years and will offer comfort to the BoE that its quest to contain price rises is nearing an end, and that it can start cutting interest rates in due course.

“It’s not quite time to pop the Champagne corks just yet though as there are two sides to the inflation story. While goods inflation, including food, has come under control, core CPI (excluding energy, food, alcohol and tobacco) rose by a still robust 3.5% in the 12 months to May 2024, down from 3.9% in April, indicating lingering pressures.

“Meanwhile, services inflation remains high at 5.7% meaning that the BoE will be watching data on wages, the key input into service costs, very closely.

“With energy prices likely to climb out of their dip from this point and a little more household spending power coming through from national insurance cuts there’s still work for the BoE to do – and the hawks on the committee will want to wait for more evidence before reducing rates.

“An interest rate cut therefore isn’t likely to happen tomorrow, but one does lie around the corner, probably in August. From this point the bank will look to follow the lead of the European Central Bank in cutting rates, in a carefully paced manner.

What does it mean for households?

“Falling inflation will be a great relief for households that have battled post-Covid cost of living challenges. With wage rises now outpacing inflation there’s an opportunity to rebuild reserves and get finances on a sounder footing.

“Many households and businesses will now be hoping for an interest rate cut at some point soon. While a cut at the meeting tomorrow looks unlikely, the first one is around the corner, which will relieve some pressure on households with variable rate mortgages. However, rate cuts will only be fine tuning rather than deep, owing to the stickiness of inflation and wage growth, so it will be a case of continuing to battle against higher borrowing costs.

“For savers, there’s an ongoing period of inflation-beating returns from cash as price rises continue to recede and interest rates remain elevated to ensure they do. It’s a case of making hay while the sun shines. Cash returns will remain attractive for a while longer before gradually losing their gloss versus assets such as bonds and shares as the year progresses and cuts in BoE rates start to come through.

What does it mean for investors?

“The delay to reductions in interest rates globally has acted as a brake on the prices investors are willing to pay for assets. That’s because when interest rates are high you can receive a higher rate of return in cash – taking no risk. Bonds have been particularly sensitive to this as they pay a predetermined and usually level return to investors. With other investments such as shares or property, cashflows can rise to some degree in sympathy with higher inflation that usually accompanies elevated interest rates. In contrast, the fixed cash flows of bonds offer no protection as rates ratchet up.

“It’s therefore been a difficult year for bonds. While many areas haven’t incurred overall losses, once you factor income the relatively healthy income they pay, the muted returns aren’t what many investors would have had in mind at the start of the year. Yet from this point they could provide attractive returns and a bonus of capital appreciation if interest rates do end up being cut a bit more quickly than widely supposed. This means bonds play a vital role in a balanced portfolio.

“Higher for longer interest rate expectations have also spilled over in to share markets with some of the weakest sector performances coming from rate sensitive such as real estate and infrastructure.”