By Ed Frankl
The U.K.'s inflation rate neared the Bank of England's 2% target in April, opening the way for a rate cut in the coming months, although prices of services continued to rise at a pace that will concern policymakers.
Consumer prices were 2.3% higher than the same month a year earlier, easing from the 3.2% rate of inflation recorded in March, the U.K.'s Office for National Statistics said Wednesday. It was the lowest inflation rate since July 2021.
That reading was nevertheless higher than the 2.1% expected by a consensus of economists polled by The Wall Street Journal.
Prices in the labor-intensive services sector continued to rise rapidly, and were 5.9% higher than a year earlier, marginally cooler than March's 6.0%. The core rate, a measure that excludes volatile energy and food prices, was higher than expected at 3.9%, from 4.2% in March.
Instead, the sharp decline in the headline measure over recent months has largely been due to energy prices that are set in world markets.
Policymakers worry that when they level out after recent declines, overall inflation will be driven higher by prices that are mainly responding to domestic pressures, including rapidly rising wages.
That will keep the central bank's policymakers on their toes ahead of the next meeting on June 20. Investors now expect they will hold the key rate in June at the current 16-year high of 5.25%, before cutting later in the year.
But while April's inflation reading makes a June rate cut less likely, it doesn't rule it out completely, said Thomas Pugh, economist at audit, tax and consulting firm RSM UK.
"Looking ahead, inflation will probably fall below 2% in May, which will be critical in making the case for a June rate cut," he noted.
The bank's Governor Andrew Bailey said Tuesday that the next move by the bank would be a cut, though it remains unclear when the decision to lower borrowing costs would be taken.
In its annual review of the U.K. economy, the International Monetary Fund said it expected to see two or three rate cuts in what remains of 2024, warning that waiting too long to lower borrowing costs could undermine the already-weak economic recovery.
Closing in on the 2% target is something of a turnaround for the U.K.
The country's inflation rate was 11.1% in October 2022, higher at its peak than many of its peers as the U.K. contended with soaring energy and food prices prompted by Russia's full-scale invasion of Ukraine.
"It's good news that inflation is now lower. But prices are still higher and it will take time for that pressure on family budgets to ease," Treasury Minister Jeremy Hunt said.
While the overall inflation rate has cooled, it isn't certain that it will stay at such levels. The BOE said earlier this month that while it expected inflation to be close to its 2% target this quarter, it would increase in the second half of 2024 as energy prices leveled off.
Inflation has rebounded in other economies, such as Spain, where it dipped to 1.9% last year but has since crept up to 3.3%. The threat of such a resurgence remains a concern for policymakers worldwide.
The sharp decline in U.K. inflation contrasts with recent readings from the U.S., where the pace of price rises has been more sticky above the Federal Reserve's target. Fed Chair Jerome Powell last week restated a wait-and-see approach in assessing upcoming inflation data before deciding on rate cuts.
The BOE will also be wary of moving too far ahead of the Fed, which could weaken the pound and cause import prices to rise and therefore lead inflation to bounce back up.
However, Governor Bailey has stressed that the bank will decide its own course, independent of the Fed's actions.
Following the release of the inflation data, the pound rose to its highest point against the U.S. dollar since March. Stocks fell at the open of trade on the FTSE 100.
Joshua Kirby contributed to this article.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
05-22-24 0343ET
