Shop Price Growth Slows Down
Shop price growth in the UK has slowed down significantly, reaching its lowest level since December 2021. According to data from the British Retail Consortium and NielsenIQ, shop price inflation decelerated to just 0.8% in the year leading up to April.
This slowdown is particularly evident in food prices, which saw inflation drop to 3.4% this month, the lowest level recorded since March 2022. Analysts attribute this decline to increased promotional activity by retailers in April, likely tied to the Easter sales season. Both food and non-food sectors experienced a moderation in inflation rates, with non-food prices, especially in clothing and footwear, witnessing significant drops due to intensified promotional efforts.
Geopolitical Tensions and Oil Prices
Despite the positive trend in shop prices, geopolitical tensions could pose a threat to future price stability. The ongoing conflict between Israel and Hamas, along with disruptions to trade flows in the Red Sea, could lead to a "knock-on impact on commodity prices, like oil," according to Helen Dickinson, chief executive of the British Retail Consortium.
Analysts at Goldman Sachs believe that suppliers could step up oil output to replenish global oil inventories, putting downward pressure on prices. However, geopolitical tensions remain a wildcard factor that could disrupt this scenario.
Interest Rate Cuts and Election Messaging
The trajectory of inflation has sparked debates regarding potential interest rate cuts by the Bank of England. Initially, expectations were for substantial monetary loosening, but recent signs of stubborn inflation in the United States have led to a reassessment of these forecasts.
While the Bank of England is anticipated to reduce UK interest rates twice this year, there is speculation that the US Federal Reserve may delay rate cuts until 2025. However, some officials, like Huw Pill and Andrew Bailey, have indicated openness to rate cuts, suggesting a potential shift in monetary policy.
The upcoming ratesetting meeting on May 9 will provide new economic forecasts, with the current base interest rate standing at a 16-year high of 5.25%. However, if there are fewer interest rate cuts this year, it could impact the Conservative party's election messaging, which has emphasized the strength of the economic recovery under Prime Minister Rishi Sunak.
Fresh Food Inflation Slows Down
Adding to the positive news, fresh food inflation has also shown a slowdown, dropping to 2.4% in the year leading up to April. This further contributes to the narrative of easing price pressures in the market.