Inflation falls but remains high enough to do damage

It is eight months since the rate exceeded 10 per cent, and while it is heading in the right directions – particularly after last month’s spike – the government’s ambition of halving inflation by the end of this year looks a forlorn hope, unless it falls rapidly each month. 

BoE is keeping its options open

“Nevertheless, consumer confidence is beginning to return and the economy may not be as harmed by this cost of living crisis as first feared,” said Quilter Investors chief investment officer Marcus Brookes.

Not only is it challenging to find the spare cash to make contributions, but it also makes it harder to generate a ‘real’ return above inflation, so the purchasing power of one’s pension is decreased.

Romi Savova, PensionBee

“For as long as the economy can hold up, the Bank of England will keep the option of interest rate rises firmly on the table. With the headline rate of inflation eventually coming down to hopefully more palatable levels, there will be an increased focus on what is going on under the bonnet with core inflation. 

“This measure failed to shift in March and this will be a real concern to the BoE. Should that fail to fall meaningfully in the next couple of months, then more aggressive monetary policy from the BoE may be required yet again.”

What goes up does not always come down

The market is already pricing in at least two further rate hikes, taking interest rates up to 4.75 per cent, “and is split on whether central bankers will need to go even further”, said AJ Bell head of financial analysis Danni Hewson.

“A cooling breeze has wafted through thanks to the fact that fuel prices have fallen back – remember last year prices at the pump hit record highs as motorists were clobbered by a surge in oil costs after Russia’s invasion of Ukraine,” she continued.

“But it’s the cost of everyday staples that has thrown a major spanner in the works. Bread and cereal prices have reached record levels, and although overall food inflation is at a wincingly high 19.1 per cent, every household will have their own unique inflation number to contend with.

“The cost of simply living has crept insidiously higher and wage increases are struggling to keep pace with such high inflation, meaning that for many people there’s a growing amount of month left at the end of money.

“And even if inflation does drop, dramatically, later this year as predicted, there is no guarantee that prices will flow in its wake, even though we know some are falling even now.”

Hewson added: “There is a time lag between those prices coming down and the consumer feeling the benefit, but that time lag can’t be dragged out longer than is strictly necessary.

“UK consumers will be utterly fed up with the situation and they’ll be angry that other parts of the world seem to be benefiting from inflation falling much faster. Warnings that some prices, notably food prices, might not yet have peaked will be beyond frustrating to many people.”

Credit, where it’s due

Standard Life managing director for customer Dean Butler also feels the BoE’s 2 per cent target will not be achieved quickly, and meanwhile households will continue to suffer. 

“It’s always worth those struggling to get by each month checking they’re claiming any and all state benefits they might be entitled to,” he said. 

“It’s estimated that £15bn of government benefits go unclaimed each year – often people are unaware of the support available to them, or just assume they won’t be eligible.”

Pensions credit, designed to support those above state pension age on low incomes is one of the least claimed, Butler said. “Claiming as much as possible now could offer people a lifeline to see them through to what will hopefully be easier times, in the near future,” he added.

UK DB is OK

While inflation has fallen a little, expectations of inflation have remained broadly unchanged over the previous month with future, further falls in inflationary growth already priced in, according to XPS Pensions Group. 

As a result, the announcement on April 19is unlikely to have a material impact on pension schemes’ funding levels. 

XPS Pensions Group senior consultant Charlotte Jones said: “Although long-term inflation expectations have remained unchanged over the previous month, market conditions for defined benefit pension schemes are significantly more favourable today than they were a year ago.

“XPS’s DB UK funding tracker estimates funding improvements of circa £270bn in aggregate over the past year, driven by the significant changes in long-term inflation and interest rate expectations. 

“However, individual schemes will be impacted differently. With some relative stability in market conditions, it is important that schemes assess their funding position and opportunities to reshape their long-term strategies.”

The cupboard is bare

The disappointment savers will feel in the relatively small fall in inflation will be compounded by concerns that high inflation makes it more difficult to build long-term wealth to meet future retirement goals. 

PensionBee chief executive Romi Savova said: “Not only is it challenging to find the spare cash to make contributions, but it also makes it harder to generate a ‘real’ return above inflation, so the purchasing power of one’s pension is decreased.

“For anyone already drawing an income from their pension, coping with inflation on a finite pot of money can be stressful. The recent rise in the state pension should provide some welcome support for pensioners, but as high inflation persists, covering the basics continues to be challenging for all, but particularly those on low, limited incomes.”