UK April CPI jumps more than expected

UK April CPI jumps more than expected (bills, bills, bills…and Easter timing effects)

April had long been expected to show a jump in UK inflation. CPI rose to 3.5% from 2.6% year-on-year (figure1). That is above consensus expectations for 3.3%. Core and services inflation were also stronger than expected at 3.8% after 3.4% for core (consensus: 3.6%) and 5.4% after 4.7% for services inflation (consensus: 4.8%). 

Much of the rise in headline inflation is about bills – energy bills and water bills, both of which rose in April. April businesses also saw that tax increase in employers National Insurance contributions and another sizeable increase in the minimum wage. It is possible that some of that increase in costs may have been passed on to consumers during this month too. As shown in figure 2, the biggest contribution of 0.75pp (percentage points) to the rise in CPI was the housing and household services category (energy and water bills), followed by 0.28pp from transport (vehicle excise duty – i.e. more bills – and airfares likely driven by Easter timing effects) and 0.11pp from recreation and culture (Easter timing effects potentially playing a role there too with a large contribution to this coming from foreign holidays).  

Most of the factors driving inflation in April are temporary (even if, for bills, we are looking at price level jumps that will linger in the year-on-year numbers for a year). April tax hikes are likely to slow hiring a bit and by increasing slack in the labour market may help reduce future inflation pressure. Firms are still indicating that pay growth is likely to slow significantly (see the Bank of England’s DMP business survey). Monetary policy is still at restrictive levels too.

Inflation has jumped, but this does not mean that the Bank of England is necessarily going to be pushed off its gradual rate cut path, even if the risk of a slower pace has risen.

What does this inflation rise mean for the Bank of England and interest rates?  A jump in inflation isn’t going to be a surprise for the Bank of England (BoE). Staff in May were expecting a jump to 3.4% after 2.6%, so only a tenth below what we got today. They are already expecting a further rise in inflation later this year (with this to then fall back). As ever, services inflation will be important for the BoE and other analysts for getting a sense for what is happening to underlying domestically driven inflation. In today’s case though, the movement in services is harder to read, with much of the jump likely attributable again to bills and Easter timing effects. Categories like communication and catering services for example saw slightly lower inflation. It is understandable that the BoE is worried about inflation persistence and will likely be watching for what happens in the inflation-related data after this jump, including concepts of core services inflation, wages and inflation expectations. But just because inflation has jumped today does not mean that the BoE is necessarily going to be pushed off its gradual rate cut path, even if the risk of a slower pace has risen a bit.  

Figure 1: UK Headline, Core, Core Goods & Services Inflation

Figure 2: Contributions to change in annual CPI inflation rate

Source: ONS[1], change shown between March and April

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