Britain’s inflation rate remained much stronger than expected, with the fastest increase in services and core prices in more than three decades fueling a flurry of bets on more Bank of England interest rate rises.
The Consumer Prices Index registered 8.7% in April, higher than any of the 36 estimates from economists or the 8.4% reading forecast by the central bank. Core prices excluding food, energy and tobacco accelerated to 6.8% last month from 6.2% in March.
The figures overshadowed the fact that inflation fell into single digits for the first time in eight months and will add to pressure on the Bank of England to keep raising interest rates through the summer. Investors quickly moved to price in the BOE raising the key rate almost a full percentage point.
“With inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after,” said Paul Dales, chief UK economist at Capital Economics.
Traders added to wagers for the BOE’s Monetary Policy Committee to deliver further rate hikes, pricing a peak of around 5.4% compared to 5.1% Tuesday. They have more than fully-priced a quarter-point hike at the next decision, implying some hedging for a larger half-point hike. The pound extended gains after the release, rising 0.3% to $1.2448, bouncing back from a one-month low touched on Tuesday.
“The MPC is placing more weight than usual on data outturns, suggesting that it is now odds-on to raise bank rate again next month,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
The latest reading was seen as a key turning point for whether the central bank could soon let up on the fight against inflation. While it marked the biggest drop in the annual inflation rate in more than 30 years, it wasn’t nearly as big as the decline policy makers led by BOE Governor Andrew Bailey were forecasting.
What Bloomberg Economics Says ...
“The smaller-than-expected drop in CPI inflation in April keeps the Bank of England on course to raise rates again in June. Looking ahead, further falls in the central bank’s target measure are likely through the summer, which we think will provide the room to begin a lengthy pause in August. The risk, as we explained here, is that rates have to go above 5% to rein in price pressure.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.
The latest CPI reading was helped by last year’s sharp increase in energy prices falling out of the comparison. Russia choked off supplies of natural gas to Europe after invading Ukraine, sending electricity prices spiraling higher across the continent.
Natural gas and and electricity combined contributed 1.8 percentage points of the fall in inflation. But the cost of telecommunications services, reflecting a jump in mobile phone bills, and alcohol and tobacco rose. The cost of used cars also rose.
“The rate of inflation fell notably as the large energy price rises seen last year were not repeated this April, but was offset partially by increases in the cost of second-hand cars and cigarettes,” said Grant Fitzner, ONS chief economist. “However, prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”
Grocery price inflation cooled slightly to 19% but remained close to the highest rate in more than 45 years. The BOE has blamed hedging by food producers and supermarkets rebuilding their profit margins again for keeping grocery inflation high despite falls on global agricultural commodity markets.
Bailey has said the central bank is looking for “evidence” that inflation is coming down before it can “rest” on its most aggressive hiking cycle in four decades. Some 12 consecutive hikes by the BOE have lifted the key lending rate to 4.5%, the highest since 2008.
The BOE expects a sharp decline in UK inflation throughout 2023 but is concerned about the persistence of price pressures even after the sharp decline in energy prices. Grocery bills have kept inflation elevated, the economy has been more resilient than expected, and the labor market remains extremely tight, fueling pay pressures.
Prime Minister Rishi Sunak has promised to cut inflation in half this year. He was expected to comfortably meet the target when it was made in January, but inflation has been stickier than the BOE had expected, surprising on the upside in each of the past two months.
“The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast,” said Chancellor of the Exchequer Jeremy Hunt. “So as well as helping families with around £3,000 of cost of living support this year and last, we must stick resolutely to the plan to get inflation down.”
--With assistance from Constantine Courcoulas, Mark Evans and Joel Rinneby.
(Updates with market reaction.)