Stay updated with complimentary notifications
Just register for the UK inflation myFT Digest – sent directly to your email.
UK inflation surged beyond expectations to a 15-month peak of 3.5 percent in April due to increased utility bills and tax hikes, leading traders to anticipate only one interest rate cut in the next year.
The Office for National Statistics’ report on Wednesday exceeded analysts’ forecast of 3.3 percent and March’s 2.6 percent.
The spike was fueled by higher energy expenses following a rise in the household price cap by regulators, along with hikes in water bills and road tax, as stated by the ONS. Additionally, escalated airfares contributed to the increase.
Services inflation, a crucial gauge of fundamental price pressures for policymakers, rose to 5.4 percent in April, surpassing analysts’ anticipated 4.8 percent and March’s 4.7 percent.
Suren Thiru, economics director at the ICAEW, remarked that last month’s uptick “underscores the severe impact on household and business finances from April’s numerous substantial bill increases and tax hikes.” Economist James Smith from ING suggested that the latest data eliminates the likelihood of a June rate cut by the Bank of England.
Traders adjusted their expectations to only one quarter-point rate cut within the next year, down from two prior to the data release, based on swaps market indicators. The pound reached its highest level against the dollar since early 2022 at $1.347 before retreating to $1.344.
The Labour government’s rise in employer national insurance contributions is also contributing to the inflationary pressure, analysts indicated. Stuart Morrison, research manager at the British Chambers of Commerce, highlighted that companies are facing a “perfect storm of cost pressures” including national insurance, a minimum wage hike, and global tariffs.
The UK’s CPI inflation rate significantly exceeded levels in Germany and France, as well as the EU average.
The BoE has committed to a cautious and gradual approach to further rate cuts after reducing borrowing costs four times since August.
However, the Monetary Policy Committee was divided over the recent decision to lower rates by a quarter-point to their lowest level since 2023. Chief economist Huw Pill expressed concerns that the BoE might be decreasing rates too rapidly and that the momentum behind declining inflation was faltering.
The inflation figures came as a setback to chancellor Rachel Reeves, who aimed to leverage stronger-than-expected first-quarter growth figures and three trade agreements.
In response to the inflation data, Reeves expressed disappointment and acknowledged that “the burden of living costs continues to weigh on working individuals.”
She added: “Although we are far from the double-digit inflation under the previous administration, I am determined to accelerate efforts to increase disposable income.”
The BoE anticipates inflation to reach 3.7 percent later this year before reverting to the 2 percent target in 2027. Nevertheless, analysts cautioned that the April data indicated higher-than-expected inflation in certain sectors of the economy. Core inflation, excluding energy and food, exceeded forecasts at 3.8 percent, while services inflation surpassed the BoE’s recent projection.
Airfares surged notably due to the timing of price data collection coinciding with the Easter holidays in April, unlike in 2024.
The key concern for the BoE is to determine whether the acceleration in April was driven by erratic or temporary factors, or if there are indications of sustained elevated inflation. Rapid wage growth, with average weekly wages rising at an annual rate of 5.6 percent excluding bonuses in the three months to March, is a particular area of worry.
“While much of the inflation increase in April can be attributed to higher utility bills, airfares, and road tax hikes, the overarching narrative remains that underlying inflation is too robust for the BoE to achieve its 2 percent target,” mentioned Andrew Wishart from Berenberg bank.
Two-year government bond yields, which are influenced by interest rate expectations, climbed 0.04 percentage points to 4.09 percent in late-morning trading.
“Families are bearing the consequences of the Labour chancellor’s decisions,” stated Mel Stride, shadow chancellor. “Elevated inflation could lead to prolonged high interest rates, adversely affecting household finances.”