As the campaigns for the general election on 4 July kicked off, both the Prime Minister and Keir Starmer emphasised “economic stability” as a particularly important theme in their speeches.

In our final economic update before the election, we take a closer look at some of the main economic news from the last month.

Inflation falls to (nearly) its target level

Inflation, as measured by the Consumer Prices Index (CPI), fell to 2.3% in April. This is well below the 11.1% it reached in October 2022, which the Office for National Statistics (ONS) estimates was the highest rate since October 1981. However, this month’s fall in inflation was not as large as economists had predicted, and the rate remains above the Bank of England’s target of 2%.

As the left-hand side of the chart below shows, the Bank of England currently expects inflation to rise slightly over the next year or so before returning to the target in 2026.

Two charts. On the left: the overall CPI rate of inflation peaked at 11.1% in October 2022 before falling to 2.3% in April 2024, with the Bank of England expecting that it will then rise to 2.6% in late 2024 before slowly falling to below the 2% target in 2026. On the right: CPI inflation in most sectors of the economy has increased (the largest is alcohol and tobacco, at 8.1%), with a few showing a decrease (the largest is housing, water and energy, at -4.9%).
Source: ONS, Consumer price inflation, UK: April 2024, 22 May 2024, and Bank of England, Monetary Policy Report – May 2024, 9 May 2024

As the right-hand side of the chart above shows, the fall in April’s inflation rate was largely driven by the price of energy, itself governed partly by the Ofgem price cap. Gas was about 37.5% cheaper in April 2024 than it was 12 months earlier, and electricity was 21% cheaper.

Prices rose in most other sectors, particularly alcohol and tobacco, although generally not as sharply as they have in recent months. “Core” inflation in April (this measure excludes energy, food, alcohol and tobacco) was 3.9%. For more on inflation, see the Library’s research briefing Rising cost of living in the UK.

The UK leaves technical recession

Initial estimates of economic growth published on 10 May suggest that the UK economy grew by 0.6% in the first quarter of 2024 (January to March).

As highlighted in the Prime Minister’s speech announcing the general election, this rate of growth was faster than that in France, Germany or the United States over the same quarter. The economy’s return to growth also means that the UK has exited the “technical recession” (two consecutive quarters of the economy shrinking) that it entered in the third quarter of 2023.

However, as the chart below shows, this growth comes in a context of relatively sluggish recovery since the Covid-19 pandemic. Within the G7, only Germany has had slower growth than the UK since the last quarter of 2019.

Line chart showing growth in GDP for the G7 countries and the Eurozone, compared to Q4 2019 (the last quarter before the Covid-19 pandemic). The UK’s GDP fell by more than any of these other countries, and as of Q1 2024 it is 1.7% above its pre-pandemic level. Only Germany has had lower growth over this period.
Source: OECD, Quarterly GDP and components – expenditure approach, retrieved 23 May 2024

The economy has also not kept pace with growth in population. GDP per person shrank in real terms in every quarter of 2023, although this measure also returned to growth in the first quarter of 2024.

Other economic news this month gave a mixed picture. Poor weather in April contributed to retail sales falling by 2.3% compared with the previous month. However, the GfK Consumer Confidence Index rose 2 points in May, reflecting improvements in people’s personal financial situations and in their expectations of the economy as a whole.

Interest rate cuts might have to wait

The Bank of England’s Monetary Policy Committee announced on 9 May that it had voted to keep the Bank’s main interest rate at 5.25%. Two of the committee’s nine members wanted to cut the rate to 5%, but overall the committee said that it had not done this yet because it had not seen enough evidence that inflation was going to stay near the target.

Labour market data has been adding to the Bank’s uncertainty about whether to reduce rates. As we have previously discussed, low response rates to surveys from the ONS mean that the data on employment and unemployment rates is less reliable than it would normally be. The Bank of England notes that some other indicators indicate stronger growth in employment than ONS data would suggest.

According to the Financial Times, financial market traders’ opinions had been evenly split on whether the Bank would reduce the interest rate at its June meeting, but following the inflation announcement they now mostly consider it unlikely.

Given the frequent changes in expectations for interest rates, it is not clear what effect this might have on mortgage costs. As the chart below shows, mortgage rates have been slowly rising since January 2024, although they are still below their recent peak reached in the middle of 2023.

Line chart showing average quoted interest rates on 2-year and 5-year fixed mortgages. Rates increased sharply in autumn 2022 from about 4% to about 6%, then decreased slowly before going up again to a peak of around 6% in mid-2023. They slowly began to rise once more at the start of 2024.
Source: Bank of England statistical database, retrieved 23 May 2024

About the author: Phil Brien is a senior researcher at the House of Commons Library, specialising in public spending.

Picture credit: number10gov on Flickr