UK CPI figures for April disappoint, despite continuing to move in the right direction

Despite both the headline and core rates moving lower, stubborn services sector pricing derails hopes of a June interest rate cut.

By Stuart Cole | @Stuart Cole | 22 May 2024

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Disappointing CPI figures from the UK this morning, with all the readings coming in above expectations. But the comfort for the Bank of England (BoE) will be that the direction of travel remains downwards.

The annual headline rate of inflation fell from 3.2% to 2.3% in April, its lowest reading since July 2021, and against expectations for a 2.1% print. The main driver behind this fall was the 12.3% reduction in the UK’s energy price cap, which took effect last month and accounts for roughly half of today's fall in the annual rate. Indeed, today’s report shows electricity and gas prices fell by 27.1% in the year to April, the largest decline on record, albeit one which comes after the huge spike in prices previously seen. In addition to lower energy prices, slowing food, alcohol and tobacco price inflation also contributed heavily to the falling CPI number, with these four components alone responsible for nearly two-thirds of today’s reduction. However, none of these items are contained in the core measure of CPI, and once stripped out leave the core annual rate falling considerably more slowly, from 4.2% to just 3.9%, against an expected print of 3.6%. And on a monthly basis, headline CPI rose by 0.3%, a rate of growth that is incompatible with a 2% CPI target. On balance, therefore, the BoE is likely to be privately disappointed with today's numbers.

And it is within the core reading that the biggest disappointment and surprise surrounding today’s numbers can be found, namely in the figure for services inflation. This fell by only 0.1%, from 6.0% to just 5.9%, very much reflecting the on-going stubbornness that is being seen in services sector pricing and which has been flagged by some Monetary Policy Committee (MPC) members as being sufficient for them to demur from cutting interest rates yet. Today’s reading will simply reinforce these concerns. Indeed, on a seasonally adjust 3-mth-on-3-mth basis, services prices rose by 6.0%, an increase on the 4.9% reading seen in March and the highest rate of increase since August last year. And there may also be some disquiet inside the MPC that the savings on energy costs households are now enjoying will simply spur them to boost spending elsewhere, with service sector items such as leisure and entertainment activities likely to benefit the most, potentially providing a further boost to services price inflation.

Looking forward, inflation should continue to decline as weaker producer price inflation feeds into retail prices and goods prices generally fall in tandem with lower global prices. The large increases that were also seen in some service sector prices, such as internet and mobile phone charges that posted annual rises in April indexed to previous higher rates of inflation, should also ease going forward. But today’s report does raise doubts about whether this will be enough to see CPI fall back to its 2% target soon; the stickiness being seen in services sector pricing simply looks too embedded and widespread to allow this. And the MPC will be reading this report with the thought at the back of their minds that the strong wages growth still being reported is likely a key factor supporting these higher services prices.

On balance, therefore, today’s report will certainly raise doubts regarding how soon and how fast the BoE will be able to ease policy. It has probably removed the chances of a first interest rate cut being seen in June - August appears to be now the soonest the BoE could consider a cut – while also reducing the total amount of monetary easing the BoE will be able to deliver this year. With two full 25bps cuts priced in pre-release, we are probably now looking at just one full cut by year end.

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Today's report has likely pushed a first interest rate cut back to August while simultaneously reducing the amount of easing the BoE will be comfortable delivering this year.