More interest rate hikes to come as Bank of England wrongfooted on inflation
Further rate hikes come in after Bank of England is AGAIN wrong-footed by inflation and core price hikes hit 31-year high
- Overall CPI fell from 10.1% in March to 8.7% in April, higher than expected
- Core inflation continues to grow to its highest level since March 1992
- Bank is likely to raise rates to 4.75% in June with the possibility of 5% this year
Markets are tightening bets on another rate hike in June after core consumer price inflation hit a 31-year high in April.
While headline inflation eased to 8.7 percent last month, core CPI — excluding energy, food, alcohol and tobacco — rose from 6.2 percent to its highest level since March 1992 at 6.8 percent, new research shows. data from the Office for National Statistics. reveals.
Core inflation is a key metric for the Bank of England, which had forecast a larger drop in headline inflation to 8.4 percent, and the surprise rise in interest rates raises the likelihood of a 25 basis point hike in key rates to 4. 75 percent.
This would be the bank’s 13th consecutive increase as it addresses the most persistently high inflation in advanced economies.
Bank of England Governor Andrew Bailey has faced criticism over the bank’s previous inflation forecasts
Headline inflation is falling, but core inflation has risen to a three-decade high
The slowdown in headline inflation was driven primarily by food and energy prices, with the former beginning to moderate from consumer-crushing levels of around 19 percent in March.
However, core inflation rose 1.3 percent for the month of April – the biggest monthly increase in 30 years.
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, said the rise “dealt a crushing blow to a beleaguered bank.”
He added: “We may still be a long way from the peak of rate hikes, with at least another 0.25 percentage point on the table for June 22.”
Guy Foster, chief strategist at RBC Brewin Dolphin, explained that while the drop in headline inflation could be explained by last year’s rise in utility bills falling out of the data, April’s price gains were still the highest this year. ‘ and ‘more than double the normal rate for the month.
He added: “The slowdown in annual food price inflation was barely significant. April’s price increases in 2023 were still the second strongest to date and well above average. Car maintenance, restaurants and cafes, and household services all increased due to labor shortages.
“The prime minister’s goal of halving inflation, seen as a cynical ambition to achieve what was already statistically predetermined, is beginning to look like a real challenge.”
Inflation in housing and household services has slowed significantly over the past month
The FTSE 100 and FTSE 250 fell in the wake of the data, while the British pound strengthened and government bonds sold off as traders discounted another 25 basis point rate hike.
Analysts at ING pointed to service inflation, which rose from 6.6 to 6.9 percent, as another driver behind expected rate hikes.
They said: ‘This appears to be largely due to companies making more widespread price changes that are typically revised annually.
‘Some of this was expected, for example that telecom prices change every year around this time. But there were some surprises, including rents rising 1.4 percent month on month, the highest month-on-month increase in more than a decade.
There are good reasons to believe that services inflation is at its peak, and we believe the drop in gas prices should alleviate a major source of cost pressure in the sector. Nevertheless, this latest data raises the likelihood of another rate hike next month.”
Thomas Pugh, an economist at RSM UK, said a 5% spike in interest rates “looks even more likely now”, with the BoE possibly being forced into two more rate hikes this year “as there are only the most tentative signs of the labor market easing and inflation is clearly more stubborn than [expected]’.
He added: ‘As services inflation is strongly related to wage growth, this will only fuel Governor Bailey’s concern that the UK is in a wage-price spiral.
The good news is that inflation should continue to fall from here, but it will probably look more like a falling feather than a crashing rock.
“The risk is that a more resilient economy means the labor market will remain tight and wage growth will decline more slowly than the bank expects, driving interest rates up and staying at that level for longer.”