Interest rate cut in June less likely as inflation falls by less than expected

It’s another big step towards price stability but not as big as expected.

The headline annual rate of inflation dropped to 2.3% in April, it lowest level for almost three years.

Inflation is now not only at a rate that would be considered “normal” but is within touching distance of the Bank of England's target rate of 2%.

This is very welcome news.

The fall in inflation has more to do will the swing in global energy and food prices and higher interest rates than government policy.

Although, you wouldn’t know this from the interviews the prime minister gave this morning.

Rishi Sunak spoke of “everyone’s collective hard work” and insisted “our plan is working”.

You can understand why. An election isn’t far away and he is hoping to persuade voters to give him some of the credit.

Of course, the lived experience of many voters is that they still feel up against it, something Mr Sunak does acknowledge.

He speaks of “brighter days ahead” because he knows that lower inflation does not mean lower prices.

Across the economy, prices are settling at a level that is around 20% higher than in July 2021 when inflation first took off.

Clothing, eating out and private rents are now 20% more expensive, the food shop and package holidays cost 30% more, insurance is almost 50% higher, domestic energy bills are almost 70% higher.

Wages are rising faster than prices again but there’s a lot of lost ground to make up.

And the strength of wage growth is also causing problems.

The Bank of England has made it clear it will not begin cutting interest rates until it is convinced that inflation will reach target and stay there.

Wage growth is stronger than the Bank is willing to tolerate and, in April, prices behaved in a way the Bank wasn’t expecting.

The headline rate came in at 2.3%, the Bank forecast 2.1%.

Services inflation - a pretty good proxy for pay growth - stood at 5.9%, the Bank had 5.5% pencilled in.

The Bank has vowed to follow the data, the data suggests there’s still inflation in the system.

Mr Sunak wants to fight the election on the back of interest rate cuts.

Yesterday, investors thought a cut in June was probable, now they are betting on the first cut in September.

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