The UK’s latest inflation figures came in lower than expected for April, according to data published by the Office for National Statistics published today (20 May), but industry commentators warn there is still pain to come.
Inflation fell by 50 basis points on a year-on-year basis between March and April, from 3.3% to 2.8%. This was partially driven by a fall in the energy price cap to 7% in April, as well a fall in food inflation from 3.7% in March, to 3% last month.
The biggest downward contributer, however, was services, with the CPI services annual rate falling by 130 basis points from 4.5% to 3.2%.
The greatest upward pressure last month came from petrol prices, which rose by an average of 16.6 pence over the course of the month, compared to a 3p fall over the same time frame last year.
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Neil Birrell, chief investment officer at Premier Miton, said: “The year-on-year figure came down nicely, partly due to favourable comparison from last year, but service sector inflation, which is important, did ease.
“However, any hopes for inflation falling further through the year will be dashed by the energy price surge we are experiencing. The Bank of England won’t see this release as a path to think about easing policy, which is likely to be going the other way this year.”
Isabel Albarran, investment officer at TrinityBridge, pointed out that while inflation is moving in the right direction, it remains “well above” the Bank of England’s 2% target, which will “keep pressure on both policymakers and the Treasury”.
“UK bond yields also remain high, while recent political uncertainty has added to market nerves. Even so, we continue to think markets are overestimating the extent of further rate hikes,” she said.
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Scott Gardner, investment strategist at JP Morgan Personal Investing, warned that better-than-expected inflation “shouldn’t mask the underlying price pressures in the economy”.
“Services inflation in particular has dropped significantly, largely because the hikes to National Insurance and minimum wages we saw last April were not repeated on the same scale this year.
“While this is welcome progress, the month-on-month data arguably offers a clearer read on the UK prices. The spike in energy costs since the war in Iran broke out continues to persist and is being felt harshly by households and businesses.
“As a result of this, there has been a jump in input prices across both manufacturing and services industries. While some costs have been absorbed by firms, output prices have increased.”
Lindsay James, investment strategist at Quilter, added that while the fall in inflation is welcome, “it will be short lived”.
“The energy price cap is expected to rise nearly 13% in July as higher underlying energy costs, caused by Donald Trump’s decision to again attack Iran, are included in the next calculation,” she said.
“It was also noted that motor fuel saw a large increase, underscoring the potential threats that still lurk for consumers and businesses and therefore we should prepare for this month to be an outlier and inflation to spike once more.”
James said the price of gas for future delivery has risen by 50% over the past 12 months amid the ongoing shutdown of the Strait of Hormuz. This is already being felt by the agricultural sector and, despite the fall in food inflation, James expects this to “worsen in the coming months without a swift agreement”.
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Susannah Streeter, chief investment strategist at Wealth Club, said the UK “still appears stuck in a 1970s-style economic backdrop of energy insecurity, persistent price pressures and growing political intervention in markets”, despite April’s fall.
“This snapshot shows the UK economy is still wrestling with the repercussions of a prolonged energy shock. There are also signs retailers are finding less room to cushion consumers from rising costs.
“Clothing prices remained firmer, with fewer discounts offered compared with the same period last year, indicating that businesses facing higher payroll costs, elevated business rates and lingering energy pressures are becoming less willing or able to absorb rising expenses.
“It is amid this backdrop that government calls for price controls are straining an already fraught relationship with the supermarket sector. While ministers may be desperate to limit further pressure on households, price caps risk distorting markets and storing up inflationary pressures for later.”
Streeter warned that, once restrictions are removed, prices could suddenly rebound. “The easing in food inflation during April also underlines how fiercely competitive the grocery sector already is, leaving little room for retailers to artificially suppress prices further.”
Next steps for the Bank of England
However, Quilter’s James said it is “not all a one-way street”. While supply chains remain disrupted, rising unemployment is dampening inflationary impact on the UK’s services sector, she added.
“While yesterday’s painful labour stats were an unwelcome development in the overall health of the UK economy, it may limit the number of rate rises that will be needed to anchor long term inflation expectations.”
TrinityBridge’s Albarran said: “Looking ahead, two-to-three rate hikes are expected in the UK in the coming 12 months, reflecting concerns that inflation could remain sticky. However, rising unemployment and slowing wage growth will make it harder for consumers to stomach higher prices.
“As the summer progresses, we expect the negative growth effects of higher energy prices to increasingly come to the attention of policy makers, as shortages begin to bite. Growth forecast downgrades should follow, along with a greater caution around rate hikes.”
JP Morgan Personal Investing’s Gardner said the UK’s mixed economic picture “underscores the challenge for the Bank of England and policymakers”.
“Energy and food inflation remains sticky even as services inflation and wage growth shows signs of cooling,” he pointed out. “This challenge is being compounded by an uncertain geopolitical backdrop in the Strait of Hormuz with the conflict’s inflationary impact starting to be felt beyond energy price rises.
“Markets are currently expecting two rate hikes later this year but there are too many unknowns right now, making any decision on future rate moves far from clear cut just yet.”
