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Our views 18 May 2022

UK CPI jumps to 9.0% on higher energy prices; what can the Bank of England do?

5 min read

April UK Consumer Price Index (CPI) jumped to 9.0%Y after 7.0%Y (consensus was for 9.1%Y). Core CPI rose in line with expectations, to 6.2%Y from 5.7%Y. Retail Price Index (RPI) rose to 11.1%Y after 9.0%Y (consensus: 11.0%Y). CPI is now at its highest levels on the long-running RPI measure and the CPI measure since the early 1980s.

This clearly remains a very long way above the Bank of England’s (BoE) 2% CPI target, but is roughly in line with the BoE staff projection for April CPI in May’s Monetary Policy Report (9.1%Y).

The main driver of the rise in CPI inflation in April was energy, specifically the gas and electricity price rise that followed the Ofgem price cap increase in April (itself a result of higher wholesale gas prices). Overall energy price inflation hit 52.1% year-on-year in April. It wasn’t the only thing going on in the data though. While the ‘housing, water, electricity and gas’ category accounted for 1.6pp of the increase in CPI inflation today, there were smaller but still significant contributions of around a tenth from ‘recreation and culture’, ‘food and non-alcoholic beverages’, ‘restaurants and hotels’ and the ‘miscellaneous’ category. Some will just represent noise (computer games again played a role, where moves in prices can reflect the changing composition of bestseller charts), some probably reflect supply chain problems and some the VAT increase on hospitality in April.

More domestically driven inflation under the surface? Some of the rise in inflation in April, including in categories like restaurants and hotels, may reflect domestic factors including pay growth (especially strong on yesterday’s data on the ‘including bonuses’ measure) and higher inflation expectations. Supporting the idea of more domestically driven inflation, there were downward contributions to inflation from only 3 out of 12 major inflation categories. Services inflation rose from 4.0% to 4.7%.

In that sense, there was little here to reassure the Bank of England – inflation remains well above target and sources of upside pressure went beyond energy prices. Some measures of inflation expectations look elevated and the labour market still looks tight. It is unlikely that we’ve seen the last rate rise this year. By raising interest rates they can cool demand to bring it down in line with supply. By acting and sounding serious about tackling high inflation, they can help lower inflation expectations. However, the Bank still sound like relatively reluctant hikers for now and have been signalling that the market has too much priced in for interest rate increases. I have been expecting at least one more rate rise this year. Two rate rises now look more likely than one though by the end of Q3 given the apparent tightness of the labour market and with a degree of front-loading sensible.

Bad news for consumers: In the meantime, these high rates of inflation continue to run faster than pay growth and the financial situation of many households will be worsening. High inflation on one side, especially high inflation in essentials like food and energy, then central bank rate hikes on the other and the outlook for the consumer looks more and more challenging.

We might be close to the peak now for UK inflation, but much will depend on supply chain pressures and on commodity prices and especially the likelihood of another big energy bill increase in October. The BoE do not expect a peak until late this year after a further rise in energy bills.

UK: Headline, core, core goods & services inflation (% year-on-year)

Chart shows UK headline, core, core goods & services inflation (% year-on-year) against regular pay growth (3M/Y) and BoE CPI inflation target

Source: Refinitiv Datastream as at 15/04/2022


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