UK Inflation Fell Below 10%, But the Report Offers Reasons For Concern
Headline CPI Eased
Headline Consumer Price Index (CPI) eased to 8.7% y/y in April as today's release showed, in the first sub-10% print since August and the smallest increase in over a year. This was mainly a result of a significant moderation in the housing and household services division, but prices for food and non-alcoholic beverages remained elevated and were the biggest contributor to the overall reading. [1]
This was a significant deceleration from the 10.1% in March and constituted notable progress from the October 2022 peak of 11.1%, which was the highest since 1981 according to Indicative modelled CPI estimates.
The Bank of England expected inflation to fall "sharply" from this release, as expressed in its latest monetary policy decision a couple of weeks back [2], while governor Bailey stood by his view yesterday that inflation "has turned the corner". [3]
Reasons for Concern
However, this deceleration was smaller than markets anticipated, while on a monthly basis, CPI actually rose 1.2% m/m, from +0.8% previously and to the highest in a year. Furthermore, Core CPI that excludes food, energy, alcohol and tobacco prices, surged 6.8 y/y in the biggest rise since 1992.
So despite the significantly lower headline print, inflation is still high and way far from the central bank's 2% target, while a look at the rest of today's data still pose reasons for concern around the high cost of living in the UK.
More to it, the labor market is tight, with wages having remained elevated to 5.8% (total pay) and 6.7% (excluding bonuses) in the January-March period, according to last week's data. This has been a constant source of worries for the Bank of England, since it does not help its efforts to quash inflation. More to it, Governor Bailey expressed concerns a few days back about second-round effects that are "unlikely" to go away quickly [4], pointing to risk of potential wage-price spiral.
Monetary Policy Implications
Even though the Bank of England expects a steep drop in inflation, it sees risks as "skewed significantly to the upside". Furthermore, it actually raised the CPI forecast to 5% this year (from 4% in the previous forecast) and to 2.25% in 2024 (from 1.5% previously expected). [2]
Policymakers had increased rates to 4.5% earlier this month and remained non-committal around future moves. However, their updated projections and the fact that they are conditioned on rates peaking at 4.75%, show that there is room for further monetary tightening. During Tuesday's Parliamentary hearings, Governor Bailey said that "we are nearer to the peak than we were", refraining from putting an end to the hiking cycle. [3]
In spite of the sharp fall in headline CPI, today's report keeps the door open to more rate hikes by the Bank of England, in order to bring inflation down to the 2% target.
Market Reaction
The UK100 slumped after today's inflation report, since this keeps pressure on the BoE for more monetary firming and for a sustained restrictive stance. GBP/USD had a mixed reaction, since it initially jumped, but then erased the move.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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