UK inflation drops to 8.7%, but food prices remain high

UK inflation fell to 8.7 per cent in April, but the fall was much smaller than the Bank of England had forecast – fueling expectations of a further interest rate hike and a selloff in the bond market.

The BoE had expected consumer price inflation to ease from 10.1 percent in March to 8.4 percent last month as energy price increases in 2022 narrowed by an annual comparison.

The government’s borrowing cost data rose as traders revised their expectations of interest rates upwards.

The yield on two-year gilts rose 0.27 percentage points to 4.4 percent, taking them to rates last seen since Liz Truss’ “mini” budget. The swap market means that rates are now expected to reach around 5.3 per cent by the end of the year.

It’s obviously been a big surprise to the whole community and we’ve seen a huge reaction,” said Peter Shefrick, economist at RBC Capital Markets. “It’s very difficult to say with any degree of confidence that this will happen in the near future. The climate will change – the UK labor market is still very tight”.

The figures will also add to the difficulties facing Andrew Bailey, BoE governor, who admitted on Tuesday that the central bank’s economic model was not accurate and that there were “huge lessons to learn” on managing high price increases.

While the headline rate of inflation is likely to decline further this year due to falling gas and electricity prices, the jump in the core inflation rate from 6.2 percent to 6.8 percent over the same period suggests that there are higher underlying inflationary pressures than expected.

Yael Selfin, chief economist at KPMG UK, said “inflationary pressures remain”.

Paul Dales, chief UK economist at Capital Economics, said although the headline rate cut was welcome, “more important was the worryingly large rebound in core inflation”.

They added that this contradicted expectations of a modest decline in underlying price pressures and suggested that “recent resilience of economic activity is exacerbating domestic inflation pressures”.

The BoE has said it will raise interest rates again if there are signs of a continuation of inflation.

Samuel Tombs, UK’s chief economist at Pantheon Macroeconomics, said the figures far exceeded expectations and were likely to prompt the central bank’s monetary policy committee to rework. “There was too little fall (in inflation) for the MPC to stop hiking in June,” he said.

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The ONS said stability in energy prices explained the fall in the core rate this year compared to a large increase last year, but this was offset by substantial increases in the prices of used cars and cigarettes.

Food price inflation remained close to a 45-year high at 19.1 per cent in April as compared to 19.2 per cent in March.

ONS chief economist Grant Fitzner said: “While prices in general have remained significantly higher than in the past year, annual food price inflation is near historic highs.”

Kitty Usher, chief economist at the Institute of Directors, said the figures were worrying, but there was still a chance that a drop in the headline rate of inflation would change sentiment among companies that determine prices and wages.

“Policymakers will hope that now that the headline rate is back in the single digits, future inflation expectations will also begin to fall, which may then self-fulfill,” she said.

The UK’s inflation rate will now be unfavorably higher than the average of other large economies such as the US, France, Germany and the EU.

In the month of April alone, UK prices rose by 1.2 per cent when gas and electricity bills were frozen. The communication component of inflation increased by 8 percent as mobile phone companies increased tariffs, which is often linked to the rate of inflation.

Food prices rose a further 1.4 percent, with similar increases in fares and package holidays during the month, and a 6 percent increase in postage costs.

UK inflation fell to 8.7 per cent in April, but the fall was much smaller than the Bank of England had forecast – fueling expectations of a further interest rate hike and a selloff in the bond market.

The BoE had expected consumer price inflation to ease from 10.1 percent in March to 8.4 percent last month as energy price increases in 2022 narrowed by an annual comparison.

The government’s borrowing cost data rose as traders revised their expectations of interest rates upwards.

The yield on two-year gilts rose 0.27 percentage points to 4.4 percent, taking them to rates last seen since Liz Truss’ “mini” budget. The swap market means that rates are now expected to reach around 5.3 per cent by the end of the year.

It’s obviously been a big surprise to the whole community and we’ve seen a huge reaction,” said Peter Shefrick, economist at RBC Capital Markets. “It’s very difficult to say with any degree of confidence that this will happen in the near future. The climate will change – the UK labor market is still very tight”.

The figures will also add to the difficulties facing Andrew Bailey, BoE governor, who admitted on Tuesday that the central bank’s economic model was not accurate and that there were “huge lessons to learn” on managing high price increases.

While the headline rate of inflation is likely to decline further this year due to falling gas and electricity prices, the jump in the core inflation rate from 6.2 percent to 6.8 percent over the same period suggests that there are higher underlying inflationary pressures than expected.

Yael Selfin, chief economist at KPMG UK, said “inflationary pressures remain”.

Paul Dales, chief UK economist at Capital Economics, said although the headline rate cut was welcome, “more important was the worryingly large rebound in core inflation”.

They added that this contradicted expectations of a modest decline in underlying price pressures and suggested that “recent resilience of economic activity is exacerbating domestic inflation pressures”.

The BoE has said it will raise interest rates again if there are signs of a continuation of inflation.

Samuel Tombs, UK’s chief economist at Pantheon Macroeconomics, said the figures far exceeded expectations and were likely to prompt the central bank’s monetary policy committee to rework. “There was too little fall (in inflation) for the MPC to stop hiking in June,” he said.

You are viewing a snapshot of an interactive graphic. This is probably due to being offline or JavaScript is disabled in your browser.

The ONS said stability in energy prices explained the fall in the core rate this year compared to a large increase last year, but this was offset by substantial increases in the prices of used cars and cigarettes.

Food price inflation remained close to a 45-year high at 19.1 per cent in April as compared to 19.2 per cent in March.

ONS chief economist Grant Fitzner said: “While prices in general have remained significantly higher than in the past year, annual food price inflation is near historic highs.”

Kitty Usher, chief economist at the Institute of Directors, said the figures were worrying, but there was still a chance that a drop in the headline rate of inflation would change sentiment among companies that determine prices and wages.

“Policymakers will hope that now that the headline rate is back in the single digits, future inflation expectations will also begin to fall, which may then self-fulfill,” she said.

The UK’s inflation rate will now be unfavorably higher than the average of other large economies such as the US, France, Germany and the EU.

In the month of April alone, UK prices rose by 1.2 per cent when gas and electricity bills were frozen. The communication component of inflation increased by 8 percent as mobile phone companies increased tariffs, which is often linked to the rate of inflation.

Food prices rose a further 1.4 percent, with similar increases in fares and package holidays during the month, and a 6 percent increase in postage costs.