Power price cuts dial down inflation, but pressure on wallets rises

CPI inflation fell to 8.7% in April. It had been in double-figures since September last year. However, inflation actually rose 1.2% between March and April. What it means for rates. Power price cuts. Petrol prices fall for a sixth month. Groceries feed higher prices. What it means for mortgages. What it means for savers. What it means for annuities.

The ONS has released inflation figures for April:

Sarah Coles, head of personal finance, Hargreaves Lansdown: Consumer price inflation, UK: April 2023 – GOV.UK (www.gov.uk)

“Power price cuts have dialled down inflation. In April, CPI finally dropped into single digits for the first time since last September. But this doesn’t mean we can afford to relax. Our wallets aren’t under any less pressure than they were last month. With one or two exceptions – including petrol – prices are still rising horribly – and inflation is actually up 1.2% from March. The fall in the annual CPI figure isn’t a sign of widespread price cuts: it comes down how it’s calculated.

Fortunately, there is some hope for the future. Falling petrol prices and lower wholesale energy prices will eventually feed into prices elsewhere. This isn’t just about filling up the car or heating our homes. Fuel powers the price of anything that is manufactured, transported or sold. Once it has time to feed into the system, we can expect to see more prices fall. Similarly, reductions in the wholesale cost of food has made a very small dent in prices, and should start to make a real difference at the supermarket till over the next 3-9 months.

The jury is out over how far and how fast inflation will fall, and there are still concerns that wage rises will feed higher prices. However, the Bank of England thinks inflation will drop from here, and will be closer to 5% by the end of 2023.

What it means for rates

The Bank of England knew this was coming, and why, so it’s not going to get over-excited at the prospect of falling inflation. It’s also likely to have an eye on core CPI  – which actually rose from 6.2% to 6.8% – the highest it has been since 1992. The fact this is on the way up is likely to fuel expectations of a rate rise when the Bank meets next month.

Power cuts

The fall in inflation owes a huge amount to energy prices – but far less to prices today than to those last April. Back then, the energy price cap was hiked by an eye-watering 54%, which has been part of the inflation equation ever since. This fell out of the figures in April, to be replaced with the change in energy prices this April – which didn’t budge an inch, thanks to the energy price guarantee. As a result, the inflation measure is lower. However, when you translate this into bills, things are actually harder now than they were a year ago. Electricity is up 17.3% in a year and gas 36.2% – which is not an insignificant rise.

We can expect more positive news from the energy market in July, when the energy price cap is expected to fall below the energy price guarantee, so we’ll be paying slightly less. It’s still eye-wateringly expensive, but it’s moving in the right direction for now.

Petrol prices fall for a sixth month

Petrol prices eased again, falling 1.3% during the month – taking us to 145.8p for petrol and 162.4p for diesel, as the threat of global recession meant less demand for oil. It means annual price rises are now down 9.9% in a year for petrol and 7.8% for diesel. Compare this to last January when they were up an astonishing 42.9% in a year. Oil price movements tend to be dragged all over the place by sentiment and fluctuations in demand and supply, so there’s always the chance of another spike. However, in the period since the April figure was measured, economic uncertainty has pushed it lower, so we’re expecting more of the same in the May figures.

Groceries feed higher prices

Food price inflation is still running at a painful 19% – although this is down very fractionally from 19.1% in March. Among the most hair-raising increases was sugar at 47.4%, olive oil at 46.4%, eggs at 37% and low-fat milk at 33.5%.

We have seen some price cuts in recent weeks – including milk, butter and bread. Low-fat milk may be up 33.5% in a year, but it’s not quite as bad as back in October when it was up 47.9%. For dairy products, part of the relief has come from people cutting back as prices rose, which caused a glut and allowed supermarkets to cut costs. And it’s not the only wholesale price to have come down. In some cases this can be passed on relatively quickly, but in an awful lot of cases it takes far longer. It means we’re going to have a tough few months before we see much movement.

What it means for mortgages

For anyone with a variable rate mortgage, the likelihood that the Bank of England will need to raise rates again means another unwelcome hike could be on the way. The price of new fixed deals, meanwhile, hasn’t moved terribly far in the past three months. Expectations that rates will go slightly higher than had been expected, and last slightly longer than previously thought, are pulling fixed mortgage rates up. Meanwhile, longer-term expectations of rate falls are pushing in the opposite direction. As we get further through 2023, and move towards expectations of interest rate cuts in 2024, we’re likely to see those mortgage rates start to fall again.

Your decision whether or not to fix, and if so, for how long, will depend on your priorities. If you fix now, you’re likely to see rates fall as we get closer to the end of the year. However, you may well be on a higher variable rate while you wait, so there’s a cost involved – and we still don’t know how long we’ll have to wait for those cuts – or how low they’ll go. Some borrowers will be happy to stick with a variable rate, because they don’t want to fix for what could turn out to be a relatively punchy rate. Others may feel that rates have fallen far enough from the peak to make it worth fixing in return for certainty.

What it means for savers

We ‘ve seen one- and five-year fixed savings rates hit 5%. Talk of more rises from the Bank of England may make it tempting to sit sight and wait for rates to rise again. However, the next rate rise is largely priced in, so it may be worth considering taking advantage of a deal sooner rather than later. As we go through 2023, and head towards likely rate cuts, we’re likely to see the shorter-term deals drop back slightly. Longer-term fixes may hold up, but an awful lot will depend on the economic outlook  by that point.

You couldn’t squeeze a wafer between fixed rates over one year and five years at the moment. Normally you’re rewarded for fixing for longer with a higher interest rate, so it may be tempting to think you may as well fix for one year, because you get a very similar rate and you’ll have the money closer to hand. However, if the forecasts are right, savings rates could be lower by the time we get 12 months down the line, so you could find a five-year fix looks decidedly less attractive at that point. Don’t get too focused on rate predictions. The right fixed period for you will be dictated by when you’re going to need the money, but if you don’t need it for five years, it’s worth considering taking advantage of five-year-rates while they last.”

What it means for annuities

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown:

“Inflation remains stubbornly high, causing misery for everyone, especially those on a fixed income such as pensioners. If they have taken a level annuity, then the income they receive doesn’t change over time and what may have seemed to be a decent income a couple of years ago may now be creaking under the pressure of increased costs.

Inflation linked annuities are available which can offer protection but it’s important to note that the starting income you receive is usually much lower than what you would get with a level product to account for the fact it increases over time. Figures from the HL annuity tool show a 65-year-old with a £100,000 pension could get £6,842 per year from a level annuity compared to £4,417 from an RPI linked one.

It can take years for the income you receive from an inflation linked annuity to catch up with the income you would get from a level one though in the current times when inflation is high this time will be much shorter.”