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Pound slides as inflation drops back to 2.4%

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Written by: Paloma Kubiak
23/05/2018
The UK rate of inflation fell back to 2.4% in April, edging closer to the Bank of England’s 2% target, official statistics reveal. But it’s had a negative effect on sterling.

The Consumer Price Index (CPI) dropped from 2.5% in the previous month, Office for National Statistics (ONS) figures revealed. It’s a far cry from the peak of 3.1% recorded in November 2017.

The fall in inflation has led to the pound losing around a third of a cent against both the dollar and euro.

Air fares and the timing of Easter helped pull the figure downward as last year, the holiday fell in the middle of April, pushing air fares up 18.6%. This year, with Easter falling at the beginning of the month, flight prices fell slightly by 0.2% between March and April.

But the downward contribution from air fares was partially offset by an increase in petrol prices. They rose 1.5p per litre in the month to April, compared with a 1.8p per litre fall in the same period last year.

Clothing and footwear also had a downward effect, with prices rising 0.4% between March and April 2018, compared with a larger 1.1% rise in 2017.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) at the 12-month rate was 2.2% in April 2018, down from 2.3% in March 2018.

‘Not too hot and not too cold’

Ben Brettell, senior economist at Hargreaves Lansdown, said: “Falling inflation comes as good news for cash-strapped households, after a prolonged spell of above-target inflation combined with anaemic wage growth. Meanwhile last week’s labour market figures showed pay excluding bonuses rising 2.9%.

“Inflation falling for the third month in a row further dents any hopes of a late-summer rate rise from the Bank of England. The Bank was thought likely to put rates up in August. But to me, it looks like 2018 will be another year of the Goldilocks economy – not too hot to stoke inflation and force interest rates higher, and not too cold to induce any panic among policymakers.”

Brettell added that a rate rise may not be seen for the rest of the year. “When they do rise, they’ll do so only gradually, and peak at much lower levels than in previous cycles. But while savers will be disappointed, it’s pretty good news for investors. Stock markets don’t tend to like rising interest rates much, so an environment where rates rise only gradually should be supportive for the UK stock market.”

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