David Brooks, Head of Policy at leading independent consultancy Broadstone, said: “After several months, today’s data shows that CPI inflation is finally within touching distance of the Bank of England’s target of 2%, with interest rate cuts now appearing to be just around the corner.”
“While the data will undoubtedly put a spring in the step of the many businesses and households who have been financially struggling with the raised prices of goods and services over the past few years, in the pensions universe, members will see now start to see their benefits go further and trustees will face less scrutiny over awarding discretionary increases.
“However, inflation’s return to pre-pandemic levels is against the backdrop of schemes having provided pension increases up to the cap that most schemes do. This does mean many, if not all, members won’t have had complete inflation protection of their pension.
“This has led to calls for schemes to share their surpluses with pensioners, a request that has gone largely unmet.
“Falling inflation also heralds the possibility of cooling interest rates and gilt yields.
“Many economists are now pricing in rate cuts by August 2024 so trustees should be using this short window to ensure they have the necessary interest rate protection in place to shelter the gains they may have made while interest rates and yields were high.
“Depending on the gains made, this would require lower levels of leverage that may have been used previously ensuring the resilience of assets, something The Pensions Regulator has been keen to see.
“If this does come to pass it will be a challenge for those schemes that may not have fared so well in recent years, and they will be wanting to stay the course of their long-term strategy to secure member’s benefits and take advantage of their gains as they come.”
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group, said: “Inflation falling to 2.3% is a significant milestone for the UK economy – it was last below the Bank of England’s 2% target in April 2021. Slowing price rises will come as great relief to people across the country, particularly if interest rate cuts follow in the summer. While some forecasters suggest that we could see an inflation ‘bounce back’ later this year and at the start of 2025, there will undoubtedly now be significant speculation that rate cuts will come sooner rather than later.
“Interest cuts are good news for borrowers, but savers could start to see lesser returns. If the Bank does decide to move in June or August, this spring could be the last chance to pick up easy-access savings deals hovering just below 5%. People are famously loyal to their bank, but securing the best possible savings rate really can make a difference over a couple of years – our analysis found that with inflation at 2%, someone with £10,000 who grabbed a 5% interest deal could see their savings worth £10,588 in real terms after two years. However, someone with the same amount to save who missed the best offers and picked up a 3% deal would have £400 less after two years (£10,189).
“For those with a greater appetite for risk, investing offers a greater chance of substantial returns, but there’s always the chance of losing money too. People able to take a long-term view could consider saving into a pension, which offers both the benefits of investing and tax efficiency.”
Danny Vassiliades, Partner at XPS Pensions Group, commented: “The ONS has today announced that CPI inflation fell to 2.3% in the year to April 2024, the lowest annual rate since July 2021. All eyes are now turning to the potential timescale of interest rate cuts, with hopes buoyed by the deputy governor of the Bank of England’s comments that summer cuts are “possible”.
Falling inflation represents good news for many private sector defined benefit members who have recently experienced inflation above their maximum guaranteed pension increases for the first time in decades. With the lowest such guarantees typically around 2.5%, defined benefit pensioners will be hoping that inflation remains at its current levels to protect against a repeat of the real income cuts they have experienced over the last two years.”
Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “Headline inflation fell to 2.3% year-on-year in April, from 3.2% in April, but by less than expected (the BoE and economists had expected inflation to fall to 2.1%). We still expect headline inflation to fall close to, or even below, target in the coming months, as energy prices and goods and food price disinflation weigh on the year-on-year comparison. However, we expect the Bank of England to pay close attention core and service-sector inflation, as a better guide to underlying inflation pressures.
“Year-on-year core and service sector inflation also fell less than expected in April, to 3.9% and 5.9% year-on-year, respectively, from 4.2% and 6.0%. Elevated core and service-sector inflation raise uncertainty about when inflation will return to target on a sustainable basis. After this morning’s release, markets reduced the probability of a June rate cut from 50% to 15% and expect between 1 and 2 rate 0.25% pa rate cuts. That pricing does not feel unreasonable given the Bank of England sets policy on where they think key measures of inflation are going, rather than where they are, currently, but the risks remain that that the Bank cuts less, rather than more, than the market expects.”
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