(Bloomberg) -- Britain’s inflation rate remained much stronger than expected, with the fastest increase in services and core prices in more than three decades fueling a flurry of bets on more Bank of England interest rate rises.
The Consumer Prices Index registered 8.7% in April, higher than any of the 36 estimates from economists or the 8.4% reading forecast by the central bank. Core prices excluding food, energy and tobacco accelerated to 6.8% last month from 6.2% in March.
The figures overshadowed the fact that inflation fell into single digits for the first time in eight months and will add to pressure on the Bank of England to keep raising interest rates through the summer. Gilts fell, the pound rose and traders quickly moved to price in further BOE rate increases, betting on almost a full percentage point of hikes through the end of the year.
“With inflation proving stickier than the Bank expected, it now seems all-but certain that the Bank will raise interest rates from 4.50% to 4.75% in June and perhaps a bit further in the months after,” said Paul Dales, chief UK economist at Capital Economics.
Money-market wagers imply the BOE will peak around 5.5% compared to 5.1% seen on Tuesday. Sterling rose as much as 0.5%, bouncing back from a one-month low touched on Tuesday, before trading 0.2% stronger at around $1.24. The yield on 10-year gilts rose more than 20 basis points to 4.37%, a level last seen in the aftermath of the UK budget crisis last year.
BOE Governor Andrew Bailey gave a measured response to the figures when speaking at a Wall Street Journal event on Wednesday afternoon, acknowledging that inflation especially on food items is taking longer than expected but that the country isn’t suffering an upward “spiral.”
“I don’t think ‘spiral’ is the right word to use,” Bailey said at an event hosted by the Wall Street Journal. “I think that gives you a connotation of things that are sort of marching upwards.”
Read more: BOE Governor Says Inflation Is Taking Longer to Come Down
“The MPC is placing more weight than usual on data outturns, suggesting that it is now odds-on to raise bank rate again next month,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
The latest reading was seen as a key turning point for whether the central bank could soon let up on the fight against inflation. It leaves the UK with the highest inflation rate in the Group of Seven nations even after the biggest drop in the headline rate in more than 30 years. That decline wasn’t nearly as sharp as the decline policy makers led by BOE Governor Andrew Bailey were forecasting.
What Bloomberg Economics Says ...
“The smaller-than-expected drop in CPI inflation in April keeps the Bank of England on course to raise rates again in June. Looking ahead, further falls in the central bank’s target measure are likely through the summer, which we think will provide the room to begin a lengthy pause in August. The risk, as we explained here, is that rates have to go above 5% to rein in price pressure.”
—Dan Hanson and Ana Andrade, Bloomberg Economics. Click for the REACT.
Prime Minister Rishi Sunak said “we should not be complacent” about inflation and that there’s “more work to do.”
“We are providing significant support to help people with a cost of living, and the Chancellor has met with companies in the supermarket and food supply chain to make sure that they are doing everything they can to bring prices down,” Sunak said Wednesday in response to questions in Parliament. He has promised to cut inflation in half this year.
The latest CPI reading was helped by last year’s sharp increase in energy prices falling out of the comparison. Russia choked off supplies of natural gas to Europe after invading Ukraine, sending electricity prices spiraling higher across the continent.
Natural gas and and electricity combined contributed 1.8 percentage points of the fall in inflation. But the cost of telecommunications services, reflecting a jump in mobile phone bills, and alcohol and tobacco rose. The cost of used cars also rose.
“The rate of inflation fell notably as the large energy price rises seen last year were not repeated this April, but was offset partially by increases in the cost of second-hand cars and cigarettes,” said Grant Fitzner, ONS chief economist. “However, prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”
Grocery price inflation cooled slightly to 19% but remained close to the highest rate in more than 45 years. The BOE has blamed hedging by food producers and supermarkets rebuilding their profit margins again for keeping grocery inflation high despite falls on global agricultural commodity markets.
Bailey has said the central bank is looking for “evidence” that inflation is coming down before it can “rest” on its most aggressive hiking cycle in four decades. Some 12 consecutive hikes by the BOE have lifted the key lending rate to 4.5%, the highest since 2008.
The BOE expects a sharp decline in UK inflation throughout 2023 but is concerned about the persistence of price pressures even after the sharp decline in energy prices. Grocery bills have kept inflation elevated, the economy has been more resilient than expected, and the labor market remains extremely tight, fueling pay pressures.
--With assistance from Constantine Courcoulas, Mark Evans, Joel Rinneby and Kitty Donaldson.
(Updates with comment from BOE governor from sixth paragraph.)
©2023 Bloomberg L.P.
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