- Headline rate of UK inflation falls to 2.3 per cent in April
- Higher than expected figures could delay rate cuts from June to August
The headline rate of UK inflation fell to 2.3 per cent in April, bringing it within a whisker of the 2 per cent inflation target. Today’s data was dubbed a “make or break release” by analysts and takes the headline inflation rate to the lowest level in almost three years. The figures came in slightly higher than the predicted 2.1 per cent, though still represent a big drop on last month's 3.8 per cent figure.
According to the Office for National Statistics (ONS), falling gas and electricity prices made the biggest downward contribution to the headline figure, though this was offset to some degree by an upward contribution from motor fuels.
Services inflation, closely watched by the Bank of England as an indicator of persistent inflationary pressure, decelerated from 6 to 5.9 per cent – significantly higher than the 5.5 per cent that rate-setters expected. Core inflation, which strips out more volatile food and energy prices, slowed to 3.9 per cent, down from 4.2 per cent last month.
Why services inflation remains in focus
The drop in the headline rate was significant (see chart) – though not unexpected. Analysts had widely anticipated a big drop in April’s figures thanks to a 12 per cent fall in gas and electricity bills at the start of the month.
Services inflation is proving more stubborn. This is partly down to the higher labour intensity of services and the ‘stickiness’ of wages as a cost. According to the latest ONS labour market figures, annual growth for regular earnings (excluding bonuses) was 6 per cent in the three months to March.
Rate-setters remain concerned about services prices, warning after the last meeting that “prices of services – for example hotels and restaurants, insurance and rents – are still rising at rates well above past averages”. This month’s figures were not helped by the pass-through from the recent increase in the national living wage and April’s ‘repricing period’ which sees many companies make annual inflation-linked price hikes.
Where UK inflation is going next
The good news is that inflation should continue to hover around the 2 per cent target over the next few months. Food price inflation is slowing rapidly, and there is scope for further disinflation in goods prices as supply chains improve. According to economists at Dutch bank ING, the Ofgem price cap should drop again in July, with electricity and gas prices subtracting at least a percentage point from the headline inflation rate over the third quarter. They expect the headline rate of inflation to stay at target for most – if not all – of the year.
But look further ahead, and forecasts start to diverge. Analysts at Capital Economics expect inflation to fall to 1 per cent by the end of 2024 due to lower energy prices and spare economic capacity. Economists at BNP Paribas anticipate a surge in the final three months of the year, so inflation rises back to 2.4 per cent.
BoE economists expect inflation to rise to 2.5 per cent by the second half of the year as ‘base effects’ from falling energy prices exert a less flattering impact on inflation figures. According to the latest Ipsos Cost of Living Monitor, the public also sees scope for a rebound. Some 40 per cent of UK respondents think inflation will rise in the next year, while only 27 per cent expect it to fall.
Rate-setters stress that they want to make sure that inflation “comes down to 2 per cent and stays there”. Though they can now claim victory on the first part, success looks less assured on the second.
Summer rate cuts are still on track
Today’s data should do little to derail hopes for summer rate cuts. It could, however, tip the balance from June to August. After the release, analysts at Capital Economics said that a cut in June now seems "very unlikely". Yael Selfin, chief economist at KPMG UK, said that the figures "may not be enough to convince more cautious MPC members to commit to a rate cut in June", though thinks August remains in play.
In forecasts released yesterday, economists at the IMF said that inflation would make a “durable return” to the BoE’s 2 per cent target only by early 2025. Yet they warned that keeping interest rates constant as inflation falls could stall the economy and lead to “an extended undershooting of the inflation target”. The body recommended between two and three 0.25 percentage point cuts this year.
Last week also saw dovish comments from the BoE’s outgoing Deputy governor and Monetary Policy Committee (MPC) member, Ben Broadbent. He said that if the economy evolves in line with BoE forecasts, then "its possible Bank Rate could be cut some time over the summer”. He added that “whatever the priors of its members the MPC will continue to learn from incoming data”. The next UK inflation release will be on 19 June, while wage data on 11 June should start to reflect the impact of the national living wage hike. Despite today's disappointment, there will be plenty more data to learn from before the MPC meets again.
