- ‘Core’ inflation keeps on rising amid worries of 'second-round' effects
- Food price inflation remains stubbornly high
Annual inflation has slowed to 8.7 per cent in the UK but the reading came in above what economists were expecting and has not diminished expectations of further interest rate increases.
The figure, released by the Office for National Statistics this morning, marked the end of a seven-month run of double-digit readings, though it remains substantially above the Bank of England's 2 per cent inflation target. It was also significantly higher than its 8.4 per cent forecast and the 8.2 per cent projected by economists.
Core inflation’, which strips out more volatile food and energy prices also increased from 6.2 per cent to 6.8 per cent last month. This will intensify concerns that the UK is experiencing ‘second-round’ inflation effects, where wage and price setting action by companies keeps inflation higher for longer.
Economists also noted that ‘base effects’ have done some of the heavy lifting. A year ago, inflation spiked as the impact of the invasion of Ukraine on energy and food prices started to feed through. This large increase has now ‘rolled off’ annual inflation rate calculations, replaced by a significantly lower value for 2023.
Adrien Pichoud, chief economist at Bank Syz, said that though the 12-month inflation rate is “mechanically deflated”, the decline in inflation will be of little relief for UK households. He added: "The reality is that prices continue to rise, and do so at a high pace, continuing to dent consumers' purchasing power." The food and drink inflation rate remains particularly high, at 19.1 per cent for the year to April.
Following Wednesday’s release, Paul Dales, chief UK economist at Capital Economics, said it was "all-but certain" the Bank would raise interest rates from 4.5 per cent to 4.75 per cent in June and "a bit further in the months after”.
Following the release, the yield on interest-rate-sensitive two-year gilts increased by 0.27 percentage points to 4.4 per cent as traders revised their expectation for higher interest rates.
Investec Economist, Sandra Horsfield, said that this was a "disappointing set of numbers" that would cause "more angst among Monetary Policy Committe members". She added that there was “not enough good news in UK April inflation data to stop hiking”.
On Tuesday, the governor of the Bank of England Andrew Bailey conceded the Bank had “very big lessons” to learn about setting policy in the presence of high uncertainty and economic shocks. Bailey, along with other Bank officials, implied that their forecasting model was not delivering accurate results, and was being given less weight as a result.
