Reaction as inflation drops to 2.3%

Kevin Brown (Scottish Friendly)

FALLING gas and electricity prices have driven UK inflation to its lowest level for almost three years.

Official figures show inflation has dropped to 2.3% in the year to April, down from 3.2% the month before.

While inflation has fallen, it remains higher than the Bank of England’s target of 2% and was slightly higher than experts expected. However, the bank has hinted that interest rates could be cut this summer. Rates are currently at 5.25% – the highest level for 16 years.

Kevin Brown, savings specialist at Scottish Friendly, has commented on this latest data:

“Inflation is continuing to prove its stickiness. Even a stark drop in energy prices has not been able to bring it down enough to hit the Monetary Policy Committee’s 2% target. While the inflation genie may be heading back into the bottle it remains to be seen if we can get the lid firmly back on and keep it there. That is more likely to make the MPC cagey to trim the base rate following its much-anticipated June meeting. Borrowers will be watching with bated breath and will be hoping they will start to loosen the fiscal straitjacket and ease the pressure on mortgage holders later this summer.

It’s clear though that any loosening will be done gradually to ensure inflation does not escape and run riot again. For cash savers, rates remain above inflation but over the medium to longer-term the best place for savers for long-term growth potential is still likely to be through investing in stocks and shares as the base rate eventually starts to tick down.

A more realistic inflation target may be needed in future. Moving the target toward 2.5%, or even as much as 3%, would create a much more achievable and sustainable long-term target and give the bank greater flexibility in how they respond to future economic challenges, which will ultimately benefit consumers.”

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