Financial markets received a boost as UK inflation fell faster than expected. The Consumer Prices Index slowed from 8.7% to 7.9%, the biggest improvement in two years, as petrol and diesel prices fell. Core inflation also slowed, but this was less dramatic as inflation excluding volatile energy and food prices fell from 7.1% to 6.9%. Food inflation appears to have passed its peak. Research agency Kantar reported food inflation has fallen for four months in a row to 14.9% down from 17.5% in March.
The positive news on inflation helped lift government bonds. Slowing inflation means markets now see rates peaking below 6% and the yield on benchmark 10-year gilts fell to 4.2%, down from 4.7% two weeks ago. UK equities also rallied strongly led by housebuilders and property developers. A lower peak for interest rates should reduce the cost of mortgage borrowing, reduce the debt burden for commercial landlords and support higher valuations. Sterling gave up some of its recent gains against the dollar.
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