City surprised as inflation dips and pound falls

Better-than-expected inflation figures have taken the financial markets by surprise, dropping to 2.4% in April. Could the squeeze finally be abating?

by Michael Northcott
Last Updated: 19 Aug 2013

The Office for National Statistics today announce that the rate of inflation in the UK was just 2.4% in April, down from 2.8% in March. That’s a pretty substantial drop, and means that the pressure on household budgets could be easing up, at least for a while.

Measured by the Retail Prices Index (RPI), inflations fell to 2.9% in April from 3.3% a month before, which although a slightly different measure (and pertaining more closely to the high street than the economy in general) is a good sign too.

The news of falling inflation saw sterling fall as currency traders obviously decided that this gives the Bank of England more leverage to use another round of quantitative easing to stimulate the economy. The pound fell by 0.7% against the US dollar (to about $1.52), and by 0.5% against the euro, to about €1.18.

So what has actually caused the fall in inflation? Well, according to the ONS data, it is mainly because petrol and diesel prices fell by 2.1 pence and 3.9% per litre respectively. That means families have to spend less money at the pump and therefore have a bit more spending power.

Unfortunately though, the cold weather meant that food prices continued to go up (commoditys price have been hit by a poor harvest from the most recent harvest season). These prices have risen by an average of 40% since recession hit back in 2007, and the cold weather in the UK specifically means fruit and veg have risen in price, too.

It is good news for incoming governor of the Bank of England, Mark Carney, as the government has now indicated that it may be more pro the central Bank placing less emphasis on its target of 2% inflation. This will give Carney some flexibility to tweak other levers, such as interest rates.

Whether or not the low rate of inflation will last however – it could go back up again just as quickly – remains to be seen. In that case, Carney’s hands may be tied…

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