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UK Inflation: What to Expect from April Data

UK Inflation: What to Expect from April Data
UK Inflation: What to Expect from April Data

 


Updated UK inflation figures are due to be published on Wednesday 22 May, with the Consumer Price Index (CPI) expected to rise by 2.7% for the year, according to FactSet estimates.

Core inflation, excluding volatile food and energy prices, is expected to fall from 4.2% in March to 3.7%.

The CPI hit 11.1% in October 2022 and has since fallen sharply. Energy prices have fallen, but concerns about food prices remain.

The Resolution Foundation, a think tank, said in a recent report that 10 years of inflation had effectively been reduced to three years, causing consumers to cut back on spending.

James Smith, research director at the Resolution Foundation, said: “Headline inflation will finally return to normal levels next week, ending the UK’s biggest inflation surge in 40 years.”

“The sheer scale of the nearly three-year inflation shock has reshaped the economy and public finances and transformed the way people use their money.

“The crisis has made us poorer. The sharp rise in prices of essential goods has hit low-income families the hardest. It has also transformed us from a nation of consumers to a nation of savers.”

CPI fell to 3.2% in March, but is expected to fall towards or even below the 2% target in the coming months, a prospect that seemed impossible at the start of the year. However, CPI is expected to rise again after 2024, creating a dilemma for the Bank of England. Nonetheless, policymakers are emphasizing that interest rate cuts mean monetary policy remains limited. Remember that the UK benchmark interest rate increased from 0.1% in December 2021 to 5.25% in August 2023.

When will UK interest rates fall?

In financial markets, there is roughly a 60% chance that the Bank of England will cut interest rates in June. However, the bank is keen to emphasize that the decision remains “data dependent” as this week's inflation figures are key. UK employment and wage data for March were better than expected.

The most recent Bank of England meeting on May 9 was a 'no change' meeting, with interest rates left at 5.25%, as expected. That said, there have been clear changes since the March meeting. One member of the nine-member monetary policy committee voted for an additional cut. The “no change” to “remove” vote ratio is 7 to 2, but more members who favor downsizing are likely to join the cohort in the coming months.

“CPI inflation is expected to be close to the target of 2% in the short term, but is expected to rise slightly to reach 2.5% in the second half of this year due to the resolution of energy-related base effects.” In a statement accompanying the May 2024 decision.

“So far, developments in the Middle East have had a limited impact on oil prices, but geopolitical factors continue to pose upside risks to the near-term inflation outlook.”

“Conditional on market interest rates and reflecting the potential for economic recession, CPI inflation is expected to be 1.9% in two years and 1.6% in three years.”

Article by James Gard, chart by Sunniva Kolostyak

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