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Our views 22 May 2024

UK: Inflation nearly at 2%, but not enough for an interest rate cut

5 min read

Year-on-year headline Consumer Price Index (CPI) fell from 3.2% to 2.3% in April, but that was higher than the consensus forecast of 2.1%.

More strikingly though, core was also stronger than expected at 3.9% (after 4.2% against consensus of 3.6%) and services inflation barely fell at all (5.9% after 6.0% compared to consensus of 5.4%). Retail Price Index came in line with consensus at 3.3% though after 4.3% (all figures year-on-year).

Energy price inflation was widely expected to fall given cuts in electricity and gas prices and duly dropped from -12.7% year-on-year to -16.7%. ‘Base effects’ more broadly were expected to help inflation lower this month too: The month-on-month increase in core CPI was more ‘normal’ compared to last year, helping year-on-year headline and core inflation to decrease… just not as much as expected.

Looking component-by-component, beyond energy, the key downward drivers were food, alcohol/tobacco (no rise in tobacco duty this April, but there was a rise last April) and the recreation category. Most, but not all, the main categories of prices contributed negatively or neutrally to the move in CPI inflation this month. There were small upside contributions though from restaurants and hotels and the miscellaneous component.

In terms of key indicators of underlying inflation pressure/domestically driven inflation, services inflation clearly remains at high levels and still isn’t falling very much. The picture is mixed category by category within services; stickiness in services inflation isn’t coming from only one category.

With inflation now close to the 2% Bank of England (BoE) target, a potential obstacle for rate cuts has been removed.  However, headline inflation was expected by BoE staff to come in at 2.1%, so today’s data was a bit stronger than that. Watching indicators of underlying domestically driven inflation is key when thinking of the BoE’s next move; They are likely to continue to focus on measures of services inflation and pay growth to help them judge whether CPI inflation will sustainably hit the target. As of today, pay growth and services inflation remain relatively strong.

There are several more key releases to come before the Bank’s next meeting in June but my central assumption remains that an August cut is more likely than a June cut, allowing more time for a more reassuring underlying inflation picture to emerge. Today’s data was not what I’d call a convincing set of evidence in favour of a rate cut.


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