UK inflation surprises for all the wrong reasons

By Hanna Ziady, CNN

London (CNN) — UK inflation dropped back below 10% in April but didn’t fall as sharply as economists were expecting, and one crucial measure of prices rose further to hit a 31-year high.

Consumer prices rose 8.7% last month compared with a year ago, down from 10.1% in March, the Office for National Statistics said Wednesday. Economists had forecast an annual rate of 8.2%, according to a Reuters poll.

“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,” ONS chief economist Grant Fitzner said in a statement.

“However, prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”

Food prices increased 19.1% in April, slightly down from 19.2% in March, which was a 45-year high.

Core inflation, which strips out volatile food and energy costs, came in at 6.8%, the highest rate since 1992 and up from 6.2% in March. The rise in core inflation, a measure closely watched by the Bank of England, raises the odds of another interest rate hike in June, economists say.

Britain’s stubbornly high inflation is a major drag on its economy because it increases the cost of everyday goods and services, dampening consumption. At the same time, interest rate hikes to combat inflation make loans and mortgages more expensive, which further weighs on spending by businesses and consumers.

On Tuesday, the International Monetary Fund (IMF) warned that the United Kingdom could suffer “higher inflation for longer” as businesses keep prices elevated and workers demand salary increases to compensate — a risk underscored by the rise in core inflation.

“With inflation proving stickier than the [Bank of England] expected, it now seems all but certain that the Bank will raise interest rates from 4.5% to 4.75% in June and perhaps a bit further in the months after,” Paul Dales, chief UK economist at Capital Economics, said in a research note Wednesday.

Martin Beck, chief economic adviser to the EY ITEM Club, said inflation should still fall quickly through the remainder of the year, as lower wholesale energy prices feed though to household bills from July.

“The indirect impact of energy prices on business costs means lower gas and electricity prices should eventually feed into lower core inflation. But strong wage growth is likely to keep services inflation high throughout this year,” he added.

The IMF said Tuesday it now expects the UK economy to grow 0.4% in 2023, upgrading its April forecast by a whopping 0.7 percentage points. But it cautioned that high inflation is still a considerable risk to the UK economy. It expects headline inflation to return to the Bank of England’s 2% target only by mid-2025.

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