UK inflation jumps in April: prospects for rate cuts dwindle

Inflation in the UK accelerated sharply in April, exceeding economists' forecasts and affecting several sectors closely monitored by the Bank of England. This surge complicates the expected trajectory of the monetary institution, which had begun to gradually lower its interest rates.

According to data released Wednesday by the Office for National Statistics (ONS), consumer prices rose 3.5% year-on-year last month, up from 2.6% in March. This is the highest level since January 2024 and the sharpest rise in inflation since 2022, when the inflationary wave began.

"Awful April"

Economists polled by Reuters had forecast inflation of 3.3% for April. Core inflation, which excludes food and energy, rose 3.8% in April, compared with the 3.6% expected.

Source: National Statistics Office, Trading Economics

In particular this unpleasant surprise is due to the rise in a number of prices (regulated gas, electricity, water) and the increase in taxation on employers.

Other technical factors also had an impact. In particular, the ONS highlighted the calendar effect of the Easter weekend, which fell in April this year and contributed to a surge in airfares, which rose by 27.5% over the month. This is the second-highest monthly increase ever recorded in this sector.

Inflation in services—a key indicator of domestic inflationary pressure—soared to 5.4%, well above the median forecast of 4.8% in a Reuters poll. This metric is key for the Bank of England and determines whether interest rates will be cut.

Nevertheless, several key components of services inflation – such as cafes/restaurants, medical services, and housing – are down year-on-year, which may point to a slowdown in the coming months.

Caution for the Bank of England

Today's figure therefore mainly reflects exceptional factors, but could nevertheless strengthen the position of some BoE members who are concerned about the lasting effects of this dynamic on corporate pricing behavior.

The Bank of England's last meeting had already revealed significant divisions. While a quarter-point cut was decided, two members argued for a 50bp cut, while two others voted for status quo.

The Bank's chief economist, Huw Pill, said on Tuesday that the pace of rate cuts had been too fast given the continued strength of wage growth. However, he described his vote this month in favor of monetary stability as a "pause" rather than a real halt to the easing cycle.

Following the release of this statistic, the markets are now anticipating only one additional rate cut in 2025—down from three at the end of the BoE's last meeting in early May—and the pound rose to a three-year high against the dollar.