According to the latest UK inflation data, Britain’s inflation rate was 10.1% in March. This is lower than 10.4% in February, but its significantly higher than that of the Eurozone which fell to 6.9%, and the US which dropped to 5% in the same month. However, the UK is still expected to meet the government’s target of halving inflation by the end of the year, according to projections by independent and Bank of England economists.
Energy prices, which currently contribute 3.5 percentage points to the inflation rate, are set to be lower than last year, which will lead to a significant fall in inflation in the coming months. But there are different subsidy regimes and energy mixes across each country’s grid and the timing of when they were introduced and when they expire makes short term comparisons of inflation challenging.
Economists and central banks believe that UK and Eurozone inflation are similar, too high for comfort and there are ‘excessive’ underlying inflation pressures in both. This is evident when stripping back more volatile components of inflation (such as food and energy) and focusing on ‘core’ inflation measures, where the UK and Eurozone rates are both around 6%.
Although UK inflation is expected to fall, the Bank of England is concerned about the UK labour market and wages. So, it is still expected that the Bank of England will need to raise interest rates above the current rate of 4.25% to achieve its target of durably returning price increases to the 2% target.
Financial markets have already priced in a quarter-point rate rise for May and further rises to bring the rate up to 5% by the end of the year. However, economists are concerned that these rate rises, if they happen, would place a recessionary force on the UK economy and exacerbate cost-of-living pressures. Especially concerning if your fixed-rate mortgage is coming to an end – 1.4 million of us are set to roll off deals this year.
We believe inflation could remain above the 2% Bank of England target for some time. When we consider long term projections during cash flow modelling for example, if you are beginning to draw on your assets, we have increased our inflation assumptions to 3%.
Overall, global inflation pressures are gradually easing. Food and energy price inflation has been high and volatile but should fall over the rest of the year. Core inflation is still high, so central banks around the world are likely to keep restrictive monetary policy until core inflation is trending back towards target.