The Bank of England is pinning its hopes on declining inflation which facilitates wage growth

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Bank of England officials are hoping the ratchet between prices and higher wages soon eases as official data on Wednesday shows a steep drop in the headline inflation rate.

The central bank expects the annual rate of consumer price inflation to fall by almost 2 percentage points from 10.1% in March to 8.4% in April, before falling to its 2% target at the end of 2024 or early 2025.

If the BoEexpectations are met, prices would still rise rapidly, but not as rapidly on an annual basis as they have over the past year.

Officials hope the rate will drop by inflation it will convince companies to think twice before raising prices or agreeing to generous wage deals.

Andrew Bailey, Governor of the BoE, said last week that the bank’s contacts with companies have suggested “falling inflation and a more flexible labor market [will] start reducing wage premiums in the second half of the year”.

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In the same speech, however, he noted that officials fear a upward wage-price spiral could continue even if the headline inflation rate declines. The more signs of these “second-round effects” persist, the greater the need for the BoE to raise interest rates, he said.

Bailey’s comments came after BoE chief economist Huw Pill said the danger to the bank’s credibility in the fight against inflation is that people and companies continue to “try to maintain their spending level before the pie shrinks.”

Economists expect a sharp drop in the headline inflation rate in this week’s data because the 54% increase in the energy price cap for gas and electricity tariffs, imposed in April 2022, will exit the calculation of annual inflation.

With the energy bill for an average consuming household capped at £2,500, compared with £1,971 in April last year and £1,277 in March last year, energy price inflation will fall in the April figures to below down 40% from 90% a year ago, according to the Resolution Foundation think tank.

Ofgem, the energy regulator, is set to announce capping energy prices for July-September on Thursday, with Cornwall Insight, the consultancy firm, expecting the bill for the average consumer drop to £2,054 for that quarter.

Although headline CPI inflation is set to decline sharply in data due Wednesday, economists expect measures of underlying price pressures to show little improvement.

Ben Nabarro, chief UK economist at Citigroup, has forecast that the UK’s core CPI inflation rate excluding food, alcohol, tobacco and energy prices will rise from 6.2% in March to 6.5% in April .

Such an increase would underscore BoE officials’ concerns about persistently high inflation, which prompted the central bank to hike interest rates in the past 12 consecutive meetings of the Monetary Policy Committee.

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The path of core inflation is, however, uncertain and other economists, such as Bruna Skarica, British economist at Morgan Stanley, predict that it will fall to 6.1% in April.

Skarica also expects food price inflation to begin to moderate, following high-profile announcements from supermarkets on milk price cuts. The annual rate of increase in food prices reached a 45-year high in March of 19.2%.

Torsten Bell, chief executive officer of the Resolution Foundation, said that while energy’s role in driving high inflation is declining, “that of food has not diminished.”

With the poorest households spending around 15% of their budgets on food compared to the richest 10% of households, inflation has been more heavily biased towards the poor than at any time since equivalent records began in 2006.

“Everyone realizes that food prices are rising, but it is less clear that the extent of the rise has been fully understood in Westminster. . . The cost-of-living crisis isn’t ending, it’s just entering a new phase,” Bell said.