Inflation could fall below two per cent by next month, with a figure of zero not far behind, city economists predict.
The experts believe that inflation is falling much faster than the Bank of England have anticipated.
Currently inflation sits at 3.4 per cent, but this is still well above the Bank’s two per cent target.
However, experts believe that this could fall to two per cent or below by May, though hitting zero in the same month “would be a something of a push“.
If inflation was to hit zero, this would mean the Bank could cut interest rates quicker which could ease some financial strain on household budgets.
To drop below two per cent as early as next month will still ease some pressure and in turn could boost support for the Conservative party ahead of the next general election.
Simon French, managing director and head of research at Panmure Gordon. said: “With ongoing falls in wholesale gas prices there is now a decent chance that UK inflation dips below two per cent in the Spring.
Many households in the UK are still dealing with debt and face giving up essentials to afford monthly bills
GETTY
“This will pile on political pressure for the Bank to deliver some pre-election interest rate cuts”.
Despite the fall in inflation, the Bank chiefs have continued to warn that the current level remains a problem.
Although the 3.4 per cent CPI figure is the lowest level in nearly two and a half years, prices are still rising but just at slower rate.
Many households in the UK are still dealing with debt and face giving up essentials to afford monthly bills.
Jay Powell, the Federal Reserve chair, warned this week that the fight against inflation is “not done” and he needed “greater confidence” to start cutting borrowing costs.
Paul Dales at Capital Economics, told the Evening Standard, said: “When the data for April are released in mid-May, I suspect we’ll discover that inflation in the UK fell below the two per cent target for the first time in three years.
“What’s more, my forecast is that inflation will fall below one per cent in the summer and by the end of the year it may be just 0.5 per cent.“
At that point, it wouldn’t take much of a further fall for inflation to disappear completely.”
Philip Shaw at Investec agreed, saying: “We have inflation dropping down to two per cent in May, so yes it could quite easily fall below target, though zero would be a something of a push by May and even beyond that.”
The Bank of England has attempted to combat rising inflation by increasing the base rate.
Between December 2021 and August 2023, the Bank of England’s Monetary Policy Committee (MPC) increased the base on 14 consecutive occasions from 0.1 per cent to 5.25 per cent.
However, since August, the MPC has opted to hold base rate at 5.25 per cent.As inflation falls, many experts expect interest rates to fall too, as early as this summer.
However, the MPC is concerned that if services inflation doesn’t fall further, the overall inflation rate might remain above its two percent target over the next few years.
LATEST DEVELOPMENTS:
After the latest meeting, Governor Andrew Bailey seemed more confident that the downward trend in services inflation would continue.
Mr Dales predicted the first cut will come in June and the base rate will fall by 25 basis points in each subsequent meeting until they hit three per cent.
His June forecast is based on the idea that by then, CPI inflation will have fallen below two per cent in April’s figures – with wage growth in the public and services also significantly dropping.
He said: “If we are wrong about the first cut in June, it’s more likely to be later than earlier as wage growth and services CPI inflation ease more slowly than we expect or the Bank of England just wants to wait for inflation to be lower before cutting interest rates.“
Economists now expect between three and five rate cuts between now and the end of the year, taking interest rates from 5.25 per cent to around four per cent by December and three per cent by the end of next year.
