Consumer price inflation fell sharply to the lowest rate in a year in April, but key measures of prices rose again last month in worrying news for the Bank of England.
Official figures from the Office for National Statistics showed that headline inflation dropped to 8.7 per cent last month from 10.1 per cent in March. The reading is higher than economist forecasts of 8.2 per cent and above the 8.4 projection from the Bank of England.
Inflation was on course to ease significantly from double-digits in April as the annual measure of price growth no longer includes the surge in energy prices recorded following the war in Ukraine last year.
The ONS said that these so-called energy “base effects” contributed to the significant drop in annual inflation, while the cost of second hand cars and cigarettes helped support higher prices.
Worryingly for the Bank of England and the government, food price inflation remained close to historic highs at 19.1 per cent in April compared to the same period last year. Surging food prices have hit household budgets this year and prompted an inquiry from the UK’s competition authority.
A closely-watched measure of core inflation, which captures the strength of underlying inflationary pressures that excludes energy and food, accelerated from 6.2 per cent to 6.6 per cent, the highest rate in 31 years.
The Bank’s chosen measure of services inflation also climbed from 6.6 per cent to 6.9 per cent, suggesting that domestic inflationary pressures are still growing despite high interest rates.
ONS data showed that the cost of clothing, household services, and restaurants and hotels all rose in April compared to the same period last year.
Borrowing costs have been raised to the highest since 2008 since December 2021 to slow the economy and cool prices. Investors think the Bank will have to carry out at least one more interest rate rise next month to 4.75 per cent, and maintain the restrictive monetary policy for the rest of the year.
Andrew Bailey, the governor of the Bank of England, admitted yesterday that the central bank had lessons to learn after more than a year of runaway prices which peaked at 11.1 per cent in October but have been slow to subside.
The Bank’s internal models now show that inflation will not come down as fast as prices rose last year, making the 2 per cent target only achievable in 2025. The Bank thinks inflation will drop steadily in the coming months, ending the year at around 5 per cent.
April’s headline inflation reading will be welcomed by the government which has made halving inflation from double-digit levels by the end of the year a key target in its economic promises ahead of a general election next year.
Earlier this month, Bailey told the British Chamber of Commerce’s annual conference that inflation would fall sharply this year but cautioned that food inflation would remain higher for longer.
Jeremy Hunt, the chancellor, said: “The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast. So as well as helping families with around £3,000 of cost-of-living support this year and last, we must stick resolutely to the plan to get inflation down.”
Rachel Reeves, the shadow chancellor, said: “As bills keep surging, families will be worried food prices and the cost of other essentials are still increasing. They will be asking why this Tory government still refuses to properly tackle this cost of living crisis, and why they won’t bring in a proper windfall tax on the enormous profits of oil and gas giants. The reality is that never have people paid so much in taxes and got so little in return.”
Paul Dales, chief UK economist at Capital Economics, said in a note to clients that with inflation proving stickier than the Bank expected interest rates were likely to be raised from 4.5 per cent to 4.75 per cent in June and “perhaps a bit further in the months after”.
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UK inflation falls to 8.7 per cent in April
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