Britain’s inflation falls by less than expected, heaping pressure on BoE

Britain’s stubbornly high inflation rate fell by less than expected last month and a closely watched measure of core price rises surged to a 31-year high, according to official data that raised the chances of more interest rate hikes.

Consumer prices rose by 8.7 per cent in annual terms in April, down from 10.1 per cent in March but still leaving Britain with the joint highest rate of inflation among Group of Seven advanced economies alongside Italy.

In Western Europe, only Austria had a higher rate.

Economists polled by Reuters had forecast that the headline CPI annual rate would drop to 8.2 per cent in April, moving further away from October’s 41-year high of 11.1 per cent.

Earlier this month, the Bank of England (BoE) forecast inflation of 8.4 per cent for April.

British government bond prices plunged as investors piled on bets that the BoE will be forced to raise interest rates repeatedly until 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 per cent to 4.75 per cent in June and perhaps a bit further in the months after,” Paul Dales, chief UK economist at Capital Economics, said.

Governor Andrew Bailey and other top BoE officials have come under increasing criticism for the surge in inflation.

One lawmaker accused central banks of a “woeful neglect of duty” on Tuesday during a hearing in parliament.

High inflation is a problem for Britain’s government as well as the BoE.

Prime Minister Rishi Sunak promised at the start of 2023 to halve inflation, which would require it to fall to around 5 per cent by the end of the year.

Sunak made the promise as one of his priorities for 2023 before an expected national election next year, with his Conservative Party flagging in opinion polls.

The BoE is due to announce its next decision on rates on June 22 and after Wednesday’s data investors were pricing the likelihood of another quarter-percentage point increase in borrowing costs next month at 100 per cent, up from 83 per cent on Tuesday.

Sterling rose against the US dollar and the euro after the figures were published before giving up some of those gains.

Two measures of underling price growth that are closely watched by the BoE - core inflation, which excludes energy, food and tobacco prices, and price increases in the services sector - both hit their highest rates since March 1992.

The economists polled by Reuters had largely expected the core inflation rate to be unchanged.

Despite the most recent fall, inflation continued to eat into the spending power of workers whose pay is rising by less.

The BoE is worried that the surge in inflation might lead to a lasting upward shift in wage demands and businesses’ pricing strategies, exacerbated by a post-pandemic cut in Britain’s labour force and problems caused by Brexit.

Annual food and drink price inflation - which soared to its highest rate since 1977 in March - cooled only marginally in April to 19.1 per cent from 19.2 per cent.

“Although it is positive that it (inflation) is now in single digits, food prices are still rising too fast,” finance minister Jeremy Hunt said in a statement. “We must stick resolutely to the plan to get inflation down.”

The ONS data offered some signs that price rises for goods will slow, potentially helping soften some of the pain for consumers paying more for services.

Prices paid by factories rose by the least in more than two years, up 3.9 per cent compared with April 2022. The prices they charged increased by 5.4 per cent, the smallest increase since July 2021.

Meanwhile the UK’s main stock indexes fell to an over one-month low on Wednesday, as a closely watched measure of core prices surged to a 31-year high in April, cementing bets of further interest rate hikes by the Bank of England.

The export-focussed FTSE 100 fell 1.5 per cent, hit by the risk-off mood in global markets on the US debt deal uncertainty. The mid-cap FTSE 250 also shed 1.5 per cent.

The pound climbed after data showed April consumer inflation (CPI) eased to 8.7 per cent but was above economists’ expectations, sparking fresh bets that the BoE would not budge from monetary tightening just yet.

Core inflation, which excludes energy, food and tobacco prices, and price growth in the services sectors both hit their highest rates since March 1992.

“Services inflation gives a better read on underlying price pressures in the economy due to close links to the labour market,” said Hugh Gimber, global market strategist at J.P. Morgan Asset Management.

“Based on the current evidence, both investors and savers should be prepared for the prospect of 5 per cent interest rates later in the year.”

Offsetting the sombre mood, Marks & Spencer Group Plc added 9.1 per cent and hit a more-than-a-year high, as the retailer forecast a modest annual revenue growth and said it would resume its dividend with an interim payout in November.