UK Inflation Eases: Energy Prices Drive Down Rates, but Challenges Remain
The UK’s inflation rate experienced a notable decline from 10.1% in March to 8.7% in April, primarily driven by a drop in energy and gas prices. This downward trend can be attributed to the exclusion of the significant energy price spike of 47.5% experienced in April 2022 from the year-on-year equation, resulting in a natural decrease in the comparative inflation rate.
While the overall inflation rate demonstrated a positive trajectory, the core Consumer Price Index (CPI), which excludes energy and food prices, presented a contrasting picture. Core CPI rose from 6.2% to 6.8% last month, marking the highest level in three decades.
Despite the decline in overall inflation, food inflation remained strong at 19.1% in April, remaining relatively steady compared to the previous month’s figure of 19.2%. Additionally, service inflation saw a modest 1.6% month-on-month increase.
Market expectations have adjusted accordingly, with two further interest rate hikes from the Bank of England now factored in. The current belief is that interest rates will peak at 5.2% by the middle of this year.
These figures emerge following new forecasts by the International Monetary Fund (IMF), which indicate that the UK’s economy is projected to grow by 0.4% instead of entering a recession in 2023.
UK bond markets sold off on Wednesday and traders pencilled in further interest rate rises after inflation fell much less than the Bank of England had forecast. https://t.co/Klzr2Eyg2O
— Personal Finance (@ftmoney) May 24, 2023
Neil Birrell, CIO at Premier Miton Investors, expressed his view on the inflation data, stating that while UK inflation is indeed moderating, the progress is slower than anticipated. This leaves the Bank of England with limited options but to continue raising interest rates during their next meeting.
Richard Carter, head of fixed interest research at Quilter Cheviot, acknowledged the positive aspect of the inflation decline but emphasized the long road ahead. Carter pointed out that inflation at 8.7% remains alarmingly high, with prices continuing to rise significantly. He anticipates a gradual decline in the inflation rate, especially if the IMF’s prediction proves accurate.
As long as wage growth remains on an upward trajectory, the Bank of England is likely to maintain the possibility of further interest rate increases. This stance is particularly relevant if core inflation persists at its current elevated level. The bank will be relieved to witness a movement in inflation, but it is cautious about prematurely concluding its hiking cycle for interest rates.