In a rare moment of vindication for the Old Lady of Threadneedle Street, official figures released this morning show a decisive cooling of food inflation across the United Kingdom. The Consumer Prices Index for food and non-alcoholic beverages eased to 4.2% in March, down from 5.1% in February and well below the double-digit peaks that haunted family budgets last year. For the Bank of England’s Monetary Policy Committee, currently engaged in a delicate dance between recession fears and price stability, this is a welcome slice of good news.
Let us not mince words. Food inflation has been the stickiest component of the broader price spiral, a brutal tax on the working household that no amount of government hand-waving could alleviate. The fact that it is now decelerating suggests that the Bank’s relentless tightening cycle is finally working its way through the supply chain. Higher interest rates, by crushing demand and strengthening sterling, have squeezed margins for retailers and wholesalers. The supermarket price wars are back, and the consumer is the beneficiary.
But before we break out the champagne, consider this. The headline figure masks considerable variation. Bread and cereals fell 0.2% month-on-month, but olive oil still climbed 12% year-on-year, a reminder that the global commodity markets remain skittish. Moreover, the decline is partly base effects: last year’s pain makes this year’s comparison look sweeter. The Bank will need to see several more months of such data before declaring mission accomplished.
For gilts, the reaction was predictably sanguine. The 10-year yield dipped three basis points to 4.01% as traders trimmed bets on a May rate cut, interpreting the data as evidence that the current policy stance is sufficient. But the market is priced for a cautious loosening later this year. Any hint of a relapse in food prices could quickly unsettle that consensus.
The Chancellor, meanwhile, will be quietly relieved. Food price stability is a cornerstone of consumer confidence, and with a general election looming, every percentage point of inflation shaved off is a vote won. Yet fiscal discipline remains the absent friend. With public borrowing still running at 4.5% of GDP, the Treasury cannot afford to be complacent. If the Bank succeeds in taming inflation only for the government to unleash a spending spree, we will simply repeat the cycle.
Across the City, the mood is one of cautious optimism. The FTSE 250, a bellwether for domestic equities, ticked up 0.2% on the news, led by supermarket stocks. Sainsbury’s and Tesco, both heavily engaged in price-matching wars, saw their shares gain ground as margins stabilise. The takeaway? Markets reward clarity, and today’s data provides exactly that: the Bank’s policy is working, albeit slowly.
Yet I cannot help a note of cynicism. The tabloid narrative will be “Inflation beaten”, but the reality is a painstaking war of attrition. Core inflation remains sticky at 4.8% in the services sector. And the labour market, while loosening, is still far from equilibrium. Wages are growing at 6.2% annually, far above the 2% target. The Bank cannot cut rates until that gap closes, or risk reigniting the beast.
What of the consumer? The erstwhile shopper, battered by 18 months of rising prices, may finally see light at the end of the tunnel. But the tunnel is long. The cumulative price level has risen 25% since 2020. A slowdown in the rate of increase is not a decline. The cost-of-living crisis is not over; it is merely evolving into a cost-of-living stagnation.
In the grand theatre of central banking, today’s data is a minor act. But it is a welcome one. The Bank of England, often criticised for being behind the curve, can justifiably point to this as evidence that its strategy is sound. But let us not mistake a single data release for a victory lap. The inflation dragon is wounded, not slain. And fiscal dragons lurk in the wings.
