April welcomed a significant drop in UK inflation as the annual consumer price comparison started to shake off the impact of Russia's invasion of Ukraine and energy prices decreased. As per the Office for National Statistics (ONS), year-on-year headline Consumer Price Index (CPI) inflation was 8.7%, lower than the 10.1% seen in March but still surpassing the 8.2% consensus forecast from a Reuters economists' poll.

Electricity and gas prices receded, contributing to the fall, though still exerting an impact on the annual inflation. While food and non-alcoholic beverage prices continue to rise, their rate of annual inflation showed a marginal easing. Despite this slowdown, this rate remains the second-highest observed in over 45 years.

This development has caught the attention of investors, who are now contemplating the potential benefits of UK ETFs in light of falling inflation and chances of lower rates.

Current Inflationary Scenario

Despite the drop in inflation, the UK's annual inflation rate for food and non-alcoholic beverages remains one of the highest in over 45 years. This indicates that there is still work to be done to stabilize prices in this sector. However, the Bank of England is closely monitoring core CPI, which excludes volatile elements such as energy, food, alcohol, and tobacco prices. The rise in core CPI from 6.2% to 6.8% raises concerns for the central bank.

Interest Rates and Economic Outlook

Persistently high inflation has been a significant concern in the UK, provoking the Bank of England to increase interest rates 12 times consecutively, most recently to 4.5%. Economists anticipate another hike in the future as inflation proves more stubborn in the UK than in other major economies.

The labor market remains strained, and the Bank's Governor, Andrew Bailey, has warned of a wage price spiral. Yet, some crucial indicators suggest potential relief. The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.8% in the 12 months to April 2023, down from 8.9% in March.

Improving GDP Growth Prospects

During the initial quarter of 2023, the UK economy experienced a growth rate of 0.1%, mirroring the expansion seen in the final quarter of 2022, in line with market predictions. Despite this growth, the overall size of Britain's economy still trails by 0.5% compared to pre-pandemic levels.

The International Monetary Fund (IMF) has projected an optimistic outlook, stating that the UK is likely to circumvent a recession and sustain positive economic growth throughout 2023. IMF expects growth to rise gradually to 1% in 2024, to average about 2% in 2025 and 2026 helped by an expected less-hawkish or dovish stance from Bank of England.

Looking Ahead: Economists' Viewpoints

Per a CNBC article, finance minister Jeremy Hunt emphasizes caution despite the falling headline rate, indicating that the economic recovery is far from over. However, Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, perceives this return to single-digit headline inflation as a sign that the UK has "turned a corner" in combatting inflation, as quoted on the article.

Thiru suggests further declines might be on the horizon with the upcoming energy price cap reduction by UK energy regulator Ofgem. He further argues that a cooling jobs market and the impact of rising interest rates could cause inflation to fall more quickly than the Bank of England anticipates.

ETFs in Focus  

Against this backdrop, investors can keep a track of iShares MSCI United Kingdom ETF (EWU Quick QuoteEWU - Free Report) , Franklin FTSE United Kingdom ETF (FLGB Quick QuoteFLGB - Free Report) , First Trust United Kingdom AlphaDEX Fund (FKU Quick QuoteFKU - Free Report) and iShares MSCI United Kingdom Small-Cap ETF (EWUS Quick QuoteEWUS - Free Report) .