The U.K. experienced a significant drop in inflation in April, attributed to the retreat in energy prices and the diminishing impact of Russia’s invasion of Ukraine on the annual consumer price comparison.
The Office for National Statistics (ONS) reported that headline CPI inflation stood at 8.7% year-on-year, down from March’s 10.1%. Although it exceeded the consensus estimate of 8.2% from a Reuters poll of economists, the decrease is a positive sign for the economy.
The ONS stated that electricity and gas prices contributed to the decline in annual inflation, as last year’s rise no longer affected the annual comparison. However, these components still contributed to the overall inflation rate. On the other hand, food and non-alcoholic beverage prices continued to rise in April but at a slower pace compared to the previous month.
Despite the slight easing, the ONS indicated that the annual inflation rate for food and non-alcoholic beverages remained the second-highest in over 45 years, based on indicative modeled estimates.
In terms of monthly figures, consumer prices rose by 1.2%, surpassing the consensus estimate of 0.8%.
In the 12 months leading up to April 2023, the Consumer Price Index including owner occupiers’ housing costs (CPIH) grew 7.8%, down from 8.9% in March. However, the core CPI, which excludes volatile energy, food, alcohol, and tobacco prices, increased by 6.8%, up from 6.2% in March, causing concern for the Bank of England.
Despite defying expectations of a recession, British inflation has remained persistently high, leading the Bank of England to raise interest rates for the 12th consecutive time to 4.5% at its recent meeting. Economists anticipate another hike at the next meeting due to the stickiness of inflation in the U.K. compared to other major economies. Additionally, the tight labor market and warnings of a wage price spiral from Governor Andrew Bailey contribute to this expectation.
The high cost of living, including food and energy bills, has led workers from various sectors to initiate mass strike action in recent months, demanding better pay and conditions.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, believes that the return to a single-digit headline rate indicates that the U.K. has made progress in combating inflation. He anticipates further declines over the summer, particularly when the U.K. energy regulator, Ofgem, is expected to reduce the energy price cap from July onwards.
While the decline in April’s inflation rate might convince the Monetary Policy Committee to keep interest rates on hold next month, caution must be exercised to avoid overtightening and worsening the cost-of-living crisis and business pressures.
Richard Carter, head of fixed interest research at Quilter Cheviot, acknowledged that the drop in inflation is a step in the right direction, but emphasized that there is still a long way to go as inflation remains remarkably high. He believes that such significant declines are unlikely to continue in the coming months, especially if the International Monetary Fund’s prediction of a more resilient U.K. economy proves accurate.
The Bank of England, while relieved by the inflation drop, will likely keep the option of further interest rate increases open as long as wage growth continues to rise, particularly if core inflation remains persistently high.