Interest rate cuts are beginning to look like a mirage: the closer we seem to get to them the more they seem to recede into the distance. Bank of England governor Andrew Bailey may have hinted this week that UK rates could soon be cut regardless of what happens in the United States, where strong jobs data is putting off the Federal Reserve from cutting rates, but this morning’s inflation data will not encourage an early cut.

While the Consumer Prices Index (CPI) did fall in March, from 3.4 per cent to 3.2 per cent, this was less than the fall which was expected. The rise in road fuel prices largely cancelled out a drop in food prices.

CPI should go down much more substantially next month, as April’s fall in the energy price cap comes into the figures, but looking further ahead the outlook is far from benign. Iran’s attack on Israel over the weekend, and possible Israeli response, has reignited the situation in the Middle East, coming on top of cuts in oil production by Opec countries. Moreover, a wet winter has caused problems for UK and European farmers, which could see a rebound in food prices.

I am not a great fan of the concept of ‘core’ inflation – which strips out supposedly more volatile food and energy prices. How can an inflation index claim to be ‘core’ when it excludes two of the biggest expenses for households? Nevertheless, the Bank of England will be looking at this measure, which remains significantly higher than CPI, at 4.7 per cent, down just 0.1 per cent from February. Moreover, housing costs are still on the rise: owner occupied housing costs are rising at a rate of 6.3 per cent. That might explain why many younger people with mortgages are still feeling very much in a cost-of-living crisis in spite of earnings apparently growing healthily (earnings are up nearly two percent in real terms over the past year).

The inflation spike which followed the pandemic, and which was further fuelled by the leap in energy prices after the Russian invasion of Ukraine, may be behind us, but it is looking far from certain that inflation will settle for long around the Bank of England’s target of 2 per cent. UK households may have to get used to the idea that interest rates are not going back to near-zero rates any time soon.

The long decade in which rates were kept below one per cent was a remarkable anomaly in the historical record – until 2009 the Bank of England’s main lending rate had never been below 2 per cent in 300 years. Yet it seems to have created an idea in some borrowers’ minds that that was somehow normal. Anyone who thinks that faces severe disappointment in coming months and years.       <//>