With UK inflation set to fall below 2% come April, a major economic paradigm shift is on the horizon. This expected decrease follows a modest inflation spike in late 2023. Many analysts expect the inflation backdrop to get better. They stress that food price and services inflation will continue to be the dominant drivers of their continued economic outlook.
In December 2023, UK inflation only increased slightly from 3.2% to 3.4%. This increase was mainly because food inflation jumped from 4.2% to 4.5%. Accelerating inflation in the category of food has raised concerns, though inflation on food remains below that forecast by the Bank of England at 5.3%. How deep of a hole are we in?
A key contributor to the expected drop in inflation is the non-recurrence of last year’s substantial rise in water and sewerage prices. In 2023, these costs increased by 25%, adding upward pressure on general inflation rates. Analysts are not expecting those same kind of increases to be matched, at least not to the same degree, this year.
Services inflation, which was 4.5% in December, will fall dramatically after April. Service inflation in the deep negatives – projected to fall to -3%. Most of these tariffs are typically only changed once a year, at the very beginning of the fiscal year. This drop in services inflation will add fuel to the overall across-the-board drop in the inflation rate.
The aviation sector has experienced this shock in an unusual way, with plane ticket prices muted again in 2024. The absence of big price swings provides welcome news for shoppers. Equally important, it prevents downward ripple effects on inflation from other sectors.
As those inflation rates recalibrate, the Bank of England’s monetary policy will be doubly important. The policy Bank Rate is currently 3.25%. Inflation trends are heading the right way, the Bank could cut rates again in June. But such decisions will be influenced a lot by the key economic indicators and the underlying state of UK economy.
The picture for UK inflation is looking good as we head into April. Some analysts expect inflation to fall below 2% for a stretch before eventually settling on this federal mark. This initial drop would be the first such major feat in the country’s ongoing recovery from the Great Recession and ensuing economic hiccups.