UK Inflation Exceeds All Estimates as Core Prices Surge

Britain pulled out of a seven-month stint of double-digit inflation in April, but the sharp decline still marked the third consecutive month that price pressures have been stronger than feared.

The Consumer Prices Index fell to 8.7% in April from 10.1% the previous month, the Office for National Statistics said Wednesday. It marked the biggest drop in the annual inflation rate in more than 30 years. None of the 36 economists surveyed expected a reading that high.

The figures are likely to fuel market expectations that the Bank of England will extend its cycle of interest-rate hikes through the summer to stamp out price pressures. The latest result was seen as a key crossroads determining whether the central bank could soon let up on the fight against inflation.

The pound extended gains after the release, rising 0.4% to $1.2466, bouncing back from a one-month low touched on Tuesday.

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.

Most concerning for the BOE, core inflation — which excludes volatile food and energy prices — accelerated unexpectedly to 6.8%, the highest since 1992 and up from 6.2% in March.

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.

BOE Governor Andrew 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 by Constantine Courcoulas

(Updates with market reaction and detail from report.)
Source from: Bloomberg