UK inflation surprises for all the wrong reasons

London CNN —

UK inflation fell back below 10% in April, but not as sharply as economists expected, and one of the key price indicators rose further, reaching a 31-year high.

Consumer prices rose 8.7 per cent last month from the same month last year, down from 10.1 per cent in March, the National Statistical Office said Wednesday. According to a Reuters poll, economists predicted an annual growth rate of 8.2%.

Grant Fitzner, chief economist at ONS, said in a statement that the inflation rate fell noticeably as last year’s big energy price hikes did not repeat this April, but were partially offset by higher used car and cigarette prices.

In general, however, prices remain considerably higher than at this time last year, and annual food price inflation is close to historical highs.

Food prices rose 19.1% in April, slightly down from 19.2% in March, a 45-year high.

Core inflation, excluding unstable food and energy costs, rose to 6.8%, the highest level since 1992, up from 6.2% in March. Economists say the rise in core inflation, a metric the Bank of England is closely monitoring, has raised the possibility of another rate hike in June.

The UK’s stubbornly high inflation is a major drag on the UK economy as it drives up the cost of everyday goods and services, dampening consumption. At the same time, rising interest rates to combat inflation make loans and mortgages more expensive, further straining business and consumer spending.

The International Monetary Fund on Tuesday warned the UK could face higher inflation for a longer period as businesses keep prices high and workers demand pay rises to compensate for the risks highlighted by rising core inflation.

inflation [Bank of England] Paul Dales, chief UK economist at Capital Economics, said in a research note on Wednesday that the central bank would likely raise interest rates from 4.5 per cent to 4.75 per cent in June.

Martin Beck, chief economic adviser for the EY ITEM club, said inflation would still fall rapidly for the rest of the year as lower wholesale energy prices from July would impact household bills.

The indirect impact of energy prices on business costs means that lower gas and electricity prices in turn contribute to lower core inflation. But strong wage growth is likely to keep service inflation high throughout the year, he added.

The International Monetary Fund said on Tuesday that it expects the UK economy to grow 0.4 per cent in 2023, raising its forecast for April by 0.7 percentage points. However, it warned that high inflation is still a significant risk to the UK economy. Headline inflation is only expected to return to the Bank of England’s 2% target by mid-2025.

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