The UK’s Consumer Price Index rose by 3.3% over 12 months to the end of March this year, compared with 3% to the end of February, according to the latest figures from the Office for National Statistics (ONS).
Inflation during March alone rose by 0.7%, compared with 0.3% over the same month last year.
Motor fuel was the largest contributor to price rises on a proportionate basis, due to ongoing conflict in the Middle East, while clothing made the largest deflationary contribution.
Core CPI, which excludes energy, food, alcohol and tobacco, rose by 3.1% over the year, which is a 10 basis-point reduction compared to the year-period to the end of February. Elsewhere, the CPI goods annual rate, and CPI services annual rate, rose from 1.6 to 2.1%, and from 4.3% to 4.5%, respectively.
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Zara Nokes, global market analyst at JP Morgan Asset Management, said: “The jump in today’s inflation data was almost exclusively driven by higher fuel prices. Sadly, the inflation picture is likely to deteriorate further in the second half of the year as the energy price cap is reset and household energy bills move higher.”
Isabel Albarran, investment officer at TrinityBridge, said that while today’s inflation reading marks “the first tangible impact of the Middle East conflict feeding through into headline prices”, this is unlikely to be “the full extent of the pressure”.
“Energy markets continued to firm into April, and prices remain elevated despite some improvement in the diplomatic backdrop,” she warned. “Even if tensions continue to ease, global oil supply is expected to stay tight.
“There is a backlog of shipments to work through, alongside damage to key infrastructure, which will take time to resolve. As a result, oil prices may remain higher for longer, with knock-on effects for both inflation and economic activity.”
‘Balancing act’ for the Bank of England
With the Bank of England’s Monetary Policy Committee due to make a decision on interest rates next week, Emma Wall, chief investment strategist at Hargreaves Lansdown, said “it is highly unlikely a single inflation print will be enough to sway policy makers into moving Bank of England base rate”.
“Inflation is likely to remain elevated in April too, and markets are now pricing in one rate rise later this year, but our house view is that rates are held through the conflict – returning to the expected rate cutting cycle later than forecast just a couple of months ago, but on path to neutral next year.”
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JPMAM’s Nokes said the BoE faces an “unenviable balancing act”. “There are clear upside risks to inflation, particularly if households – who have become accustomed to persistent price pressures for some time – demand higher wages to restore their eroded purchasing power.
“Simultaneously, there is a risk that with the labour market already weak and vacancies trending down, households pare back consumption in response to cost-of-living pressures, amplifying downside risks to growth.
“The Bank will want to see which of these two forces prevails; I suspect it will be the latter, and that rates will therefore remain on hold for an extended period.”
TrinityBridge’s Albarran said now, policymakers must balance up the risk of persistent inflation, against the need to bolster growth amid a supply shock.
“This decision is further complicated by February’s stronger-than-expected GDP data, as well as heightened political uncertainty linked to instability within the Labour Party,” she explained.
“Market pricing has also shifted. Futures now point to one rate hike over the next 12 months in the UK, a moderation from the more aggressive expectations seen as recently as last week, and broadly consistent with our view that the Bank of England is likely to remain cautious and data-dependent.”
Risk of a policy misstep?
Lindsay James, investment strategist at Quilter Cheviot, warned that an increase in interest rates from the central bank “risks misdiagnosing the problem”, given inflation is being driven up by supply disruption as opposed to excess demand.
“Higher interest rates will do nothing to increase the flow of oil or other goods from the Middle East,” she pointed out. “Financial markets are behaving as though the conflict is effectively over, with equity markets largely recovered and oil prices for future delivery falling from around $95 for June contracts to closer to $80 by year end.
“The physical market tells a very different story. Prices for immediate delivery into Europe are trading roughly $28 above benchmark levels, reflecting transport disruption rather than longer‑term demand.”
But even if the US-Iran conflict were to end sooner rather than later, James said its inflationary effect will continue to be felt over the coming months. And, while a reopening of the Strait of Hormuz could reduce rate hike expectations, nobody knows how long supply chains will remain impaired for.
“The problem is that this inflation shock is landing as the domestic economy is weakening,” she continued. “Recent labour market data show payrolled employment falling, inactivity rising and wage growth easing. Rising prices alongside weakening earnings growth is a clear recipe for declining real purchasing power.
“A swift resolution to the conflict must be the priority, but today’s inflation numbers also highlight how little has changed since the last energy crisis. Greater energy self‑reliance remains essential, including increased production, generation and storage.”
