Cost of living - latest: Another UK interest rate hike now 'probable' as inflation doesn't fall as much as expected (2023)

Key points
  • Inflation falls to 8.7%
  • Cost of living crisis is starting to abate - so why are economists not happy and what could happen next? | Ed Conway
  • Another interest rate rise now 'firmly on table'
  • New prediction for when 2% inflation target will be hit
  • IMF dramatically upgrades outlook for UK economy
  • Netflix's crackdown on password sharing starts in UK
  • Your dilemmas: My employer has reduced my hours while I'm on maternity leave - is this allowed?
  • Budgeting Mum: Saving for your children | Do food subscriptions save you money?| Holiday spending money| Best broadband deals


Spending calculator: See which prices have gone up or down

As we have been outlining through the morning, prices have increased over the past 12 months by 8.7% on average, putting pressure on already stretched household budgets.

But how much has your individual spending gone up? Use our calculator to see how much prices are rising on the groceries, clothing, and leisure activities you pay for.


Average house price drops by £3,000 since last month - but it's increased since last year

The average UK house price increased by 4.1% in the 12 months to March, according to the Office for National Statistics (ONS).

A typical property now costs around £285,000 - £11,000 more than this time last year.

But March's figure is £8,000 cheaper than the recent peak in November, and £3,000 less than February.

Here's a national breakdown of house prices and how much they have risen since March 2022:

  • England - £304,000 - up 4.1%
  • Wales - £214,000 - up 4.8%
  • Scotland - £185,000 - up 3%
  • Northern Ireland - £172,000 - up 5%

Regular readers will remember earlier this week that Rightmove said house prices had jumped in the last month. Their figures are bang up to date - whereas the official ones released by the ONS have a lag.


Another interest rate hike now 'firmly on table'

It's not just our own Ed Conway who believes today's inflation figure could prompt another interest rate rise.

Pantheon Macroeconomics said the drop from 10.1% to 8.7% was "too small".

Interest rate rises, of course, are a way for the Bank of England to try to ease inflation, because they mean people have less money to spend, and are encouraged to save, and when this happens prices tend to go up less quickly.

Pantheon Macroeconomics says: "A further increase in Bank rate to 4.75% at the MPC's next meeting on 22 June, from 4.5%, now is firmly on the table."

Sky-high food prices and rising inflation in the services sector will be a "worry" for the Bank, the firm said.

On what will happen with inflation now, Pantheon Macroeconomics points to something that we're expecting tomorrow...

"CPI inflation will continue to fall quickly over the coming months. Tomorrow, Ofgem likely will announce that the typical household’s annualised energy bill will drop to about £2,050 in July, down 18% from the current £2,500 level.

"This will ensure that energy’s contribution to the headline rate falls."


Three-minute read: Cost of living crisis is starting to abate - so why are economists not happy and what could happen next?

By Ed Conway, economics and data editor

They sometimes call economics the "dismal science", and listening to economists today you can understand why.

Inflation - the percentage rate at which prices are rising each year - has just fallen out of double digits for the first time since last summer - down from 10.1% in March to 8.7% in April.

Finally, the cost of living crisis - or rather the rate at which the crisis is worsening - is beginning to abate. So why are economists so glum this morning?

It comes back to the fact that lurking beneath that one big inflation number are two separate issues. And while the news on one is good, the news on the other is bad.

Let's take the good news first.

The main thing pushing up the cost of living over the past couple of years has been rising energy prices.

They've been reflected in our household bills and our fuel costs, as well as, to some extent, everywhere else too. It has been a miserable period for many.

So it's welcome news that some of that pressure is beginning to abate. While energy bills are still many multiples higher than they were a few years ago, the rate at which they're rising (and remember, inflation is a rate of increase over a year, not absolute levels) is slowing.

The very biggest leaps in energy bills happened more than a year ago, and so the annual rate of energy price inflation no longer looks quite so dramatic.

And there'll be better news on this front tomorrow when Ofgem announces the latest level for the energy price cap - which will determine household bills later this summer.

It's expected to fall for the first time in years.

But there's something else going on here, too. Because when economists look at inflation they tend to be most exercised not by higher fuel or food prices.

Painful though they may be for households, these prices are quite volatile from year to year. But strip those volatile elements away from overall inflation, and you are left with something called "core inflation".

This is a better measure of the underlying direction of travel for inflation. If core inflation is high it means there's a greater chance that overall inflation stays high, not just for a short period but for the long run. And core inflation is high right now.

Indeed, far from falling in April like the overall rate, it actually rose, from 6.2% to 6.8%, the highest level in three decades.

That's the kind of number that deeply worries economists, since it suggests there's a chance inflation is becoming embedded in the economy - that households and businesses are beginning to assume prices are going to carry on rising for some time.

In other words, while the headline number reported today looks like good news for most of us - and indeed it is in some respects good news - the underlying picture from today's figures is quite the opposite. It suggests inflation is more sticky, more of a problem, than it previously seemed.

And the upshot of that is that the Bank of England is likely to look at today's figures and assume its work is not yet over.

Its job is to ensure inflation remains as close as possible to 2%, and today's figures make that job look a lot harder.

So the likelihood is that the Bank will raise interest rates again at its meeting next month, to 4.75%. And perhaps even higher thereafter, which will in turn only increase the pressure on many households.

Dismal as it might sound, this cost of living crisis isn't yet over.


Asda to run £1 kids meals again during half-term

To help with rising food prices, Asda has announced it will run its Kids Eat for £1 café meal deals over the forthcoming half-term.

The supermarket served over 115,000 meals in the two-week Easter holiday period.

"The deal stands apart from other retailers as it comes with no hidden extras such as a minimum adult spend," Asda said.

The menu includes Penne Pasta with Meatballs and a vegan Hidden Veg pasta meal. Kids also receive a free piece of fruit when purchasing the hot £1 meal deal.

As an alternative to a hot meal, Asda Café’s also offer a £1 cold pick and mix selection that includes a sandwich, drink and piece of fruit.


New prediction for when inflation will hit 2% target

While it is positive that inflation has fallen to 8.7%, it is still a long way off the Bank of England's 2% target - and as we have been discussing, the headline figure is not coming down as quickly as expected.

Alluding to the core inflation issue we outlined in our 7.42am post, Jake Finney, an economist at the PwC accounting firm, said: "More troublingly, services inflation - which the Bank of England pays close attention to - rose from 6.6% to 6.9%.

"This is its highest rate since March 1992 and is higher than the Bank of England's expectation of 6.7% earlier this month."

Following today's announcement and "more persistent inflation pressures", he believes the Bank will not hit its 2% target until late 2024.

"By then, consumer prices could have risen by as much as one-fifth," he added.

Despite this, Mr Finney predicts inflation will continue to fall over the coming months, with the next noteworthy decline likely to come in July when the energy price guarantee comes to an end.

"At that point, large falls in wholesale gas prices will start to translate into lower energy prices for UK consumers," he said.


Falling inflation will take time to materialise in supermarkets - ONS

This is what Grant Fitzner, chief economist for the Office for National Statistics, has been saying in morning interviews.

"We are no longer in double digit territory," he told BBC Radio 4. "We have seen falls in bread, cereals, fish, milk, cheese, eggs, sugar, jam and honey - so that is positive."


"Let's not forget a lot of supermarkets have fixed contracts which can take six or 12 months to roll off, as those contracts expire you would expect them to be renegotiated at lower prices.

"It'll take some time for this to wash through to retail prices."


Jeremy Hunt responds - as Labour attacks government

Chancellor Jeremy Hunt has given his response to the inflation figures.

"The IMF said yesterday we've acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast.

"So as well as helping families with around £3,000 of cost of living support this year and last, we must stick resolutely to the plan to get inflation down."

We've also had comments from shadow chancellor Rachel Reeves, who said: "As bills keep surging, families will be worried food prices and the cost of other essentials are still increasing.

"They will be asking why this Tory government still refuses to properly tackle this cost of living crisis, and why they won't bring in a proper windfall tax on the enormous profits of oil and gas giants."

She said Labour's mission was to secure the highest sustained growth in the G7 to make families better off.


Inflation not coming down as quickly as expected and core inflation up - this could mean another interest rate rise

Core inflation, which excludes energy, food and tobaccoprices, rose to 6.8% - the highest rate since March 1992.

The exclusion of these volatile elements gives us a more precise idea of how the economy is looking, and the figure is likely to concern the Bank of England ahead of its next interest rate decision on 22 June.

We do have another inflation figure before then, of course, but data and economics editor Ed Conway explains what this could all mean for people...

"The issue is inflation hasn't fallen quite as much as a lot of people had expected.

"City economists thought it was going to come down to 8.2%. Maybe the fact that it's 8.7% means the Bank of Englandnow needs to make a decision about interest rates.

"They're currently at 4.5%. A lot of people thought, well, if inflation is down, maybe 8.1%, 8.2% this time around, the Bank might not have to raise interest rates even more in its next meeting.

"The fact that it's quite high in comparison to what was expected means they probably are going to have to raise rates again."


Three areas where inflation rose - plus food inflation remaining sky high

We've been drilling into the Office for National Statistics data released a short time ago. The ONS points to four areas where inflation either remains sky high or rose.

Food and non-alcoholic beverages...

"... saw an annual rise of 19.1% in April 2023 compared with an annual rise of 19.2% in March 2023," according to the ONS.

Price movements on bread and cereals, fish, milk, cheese and eggs, and sugar, jam and honey contributed to this slight drop in this area, the ONS added.

Vegetable prices rose at a faster rate in April, however.

Recreation and culture...

"Prices for recreational and cultural goods and services rose, overall, by 6.4% in the year to April 2023, up from 4.6% in March," the ONS said.

"Audio-visual equipmentprovided the largest positive contribution, which saw a monthly increase of 1.5%compared with a fall of 2.8%in the equivalent time period last year."

The ONS noted, however, that "movements in this class depend, in part, on the composition of bestseller charts".

Therefore, short-term movements in the rate "should be interpreted with a degree of caution".

Alcohol and tobacco...

"Rose by 9.1% in the year to April 2023, up from 5.3% in March. The main contribution tothis increase came from an 11% rise in tobacco prices in the year to April 2023," the ONS said.

The increase was influenced by the rise in tobacco duty, which had not increased since October 2021.

Wine and beer also contributed to upward movement.


"The annual inflation rate for transport was 1.6%, the first increase in its rate of annual inflation in nine months," the ONS said.

"An important contributor to this rise was the purchase of second-hand cars, which saw an increase of 2.7% between March 2023 and April 2023 compared with a fall of 3.1% in the same time period last year."

Motor fuel, however, saw declining inflation.

Top Articles
Latest Posts
Article information

Author: Delena Feil

Last Updated: 06/05/2023

Views: 5744

Rating: 4.4 / 5 (65 voted)

Reviews: 88% of readers found this page helpful

Author information

Name: Delena Feil

Birthday: 1998-08-29

Address: 747 Lubowitz Run, Sidmouth, HI 90646-5543

Phone: +99513241752844

Job: Design Supervisor

Hobby: Digital arts, Lacemaking, Air sports, Running, Scouting, Shooting, Puzzles

Introduction: My name is Delena Feil, I am a clean, splendid, calm, fancy, jolly, bright, faithful person who loves writing and wants to share my knowledge and understanding with you.