The squeeze on household finances is “set to wane”, economists predicted after inflation fell to its lowest level for seven months in April – catching the markets by surprise.
Sterling tumbled almost a cent against the dollar, down 0.7pc to $1.5145, as traders said falling inflation raised the prospect of more stimulus when Mark Carney takes over as Bank of England Governor in July.
Economists had expected the consumer prices index (CPI) to drop to 2.6pc from 2.8pc in March on the back of a recent dip in petrol prices, but the Office for National Statistics revealed a far steeper fall to 2.4pc. That was led by a sharp decline in transport costs, particularly air fares which declined 6.4pc between March and April, and petrol prices, which were down 2.1p a litre.
Scotiabank’s Alan Clarke described the result as “a big surprise”, while David Tinsley of BNP Paribas said: “[It] does support our view that UK inflationary pressures are set to wane. In turn that supports are view that there will be more room for monetary loosening in the UK when the new Governor takes over.”
The shock fall, even if it is temporary, will provide some relief for households, where wages are rising far more slowly than prices. Average pay excluding bonuses is rising at just 0.8pc, the ONS revealed last week, the slowest rate since records began in 2001.
Inflation is expected to climb back to 3pc later this year as the air fares effect unwinds and the impact of weaker sterling comes through, piling the pressure on once again.
“The bottom line is this is not the start of a collapse. A lot of the fall is temporary,” Mr Clarke said. The surprise CPI decline, to the lowest it has been since last September’s 2.2pc, was in part explained by the early Easter, which meant last year’s spike in air fares for the April holidays was not repeated.
Minutes from the Bank’s rate-setting committee meeting on Wednesday will reveal whether policymakers are as keen to increase the £375bn quantitative easing programme as earlier this year. The outgoing Governor Sir Mervyn King and two others have been calling for more QE since February.
Morgan Stanley said: “Lower inflation gives a bit more room for manoeuvre on policy should the economy disappoint. We still assume a second half recovery and no further easing though.”
Falling oil and food prices have lowered inflation expectations recently, potentially making it easier for the Bank to justify more stimulus programmes. Last month, the dip in petrol prices was the single largest contributor to the drop in inflation.
The only notable upward contribution to the CPI came from food and non-alcoholic beverages, where prices rose 0.7pc over the month.
Including housing costs, the CPIH measure, inflation was 2.2pc in April – down from 2.6pc in March. The often used but now discredited retail prices index (RPI) was 2.9pc and the new version, RPIJ, was 2.3pc.
A Treasury spokesman said: “This is good news for families and businesses. Inflation is down by more than a half from its peak. The Government has taken consistent action to help with the cost of living. Fuel duty and council tax have been frozen and hundreds of pounds has gone back into people’s pockets through increases in the tax free personal allowance.”
Cathy Jamieson, Labour’s shadow treasury minister, said: “This fall in the inflation rate is welcome, but the squeeze continues as prices are still rising much faster than wages. On top of stagnant wages, rising food prices and soaring energy bills, the average family is £891 worse off this year because of tax and benefit changes since 2010.”