According to EY’s Item Club, although Consumer Price Index (CPI) inflation fell to 8.7% in April, this was above the consensus forecast and the Bank of England’s expectation.
April’s fall was accounted for by declines in energy and fuel prices. However, both services and core inflation rose, pointing to stickiness in underlying price pressures. The Monetary Policy Committee’s (MPC) guidance has been that any further interest rate rises would be dependent on upside surprises for activity, wages and inflation.
This information and the services inflation readings both came in above the Bank of England’s latest forecast. As a result, another rise in interest rates next month is looking increasingly likely, but further clarity will be offered by June’s pay and inflation releases.
EY’s Item Club chief economist, Martin Beck, said: “Although CPI inflation fell to 8.7% from 10.1% the previous month, the fall was more modest than the Bank of England had expected. The fall in the annual rate was accounted for by last April’s hefty 48% rise in energy prices coming out of the annual comparison. However, this was offset by continued strength in underlying price pressures, with both core and services inflation increasing, as well as food price inflation remaining close to its highest rate in 45 years.
“The MPC’s guidance implies that further tightening in monetary policy depends on upside surprises in the data for activity, inflation, and wages. Headline CPI inflation in April came in above the Bank of England’s forecast of 8.4%. Meanwhile services inflation – a series the MPC often cites as a key indicator of domestically-generated price pressure – rose to 6.9% in April from 6.6% the previous month, above the Bank of England’s projection of 6.7%. Given March’s GDP and pay growth data came in broadly as the Bank of England had projected, today’s inflation data raises the chances of a further rate rise at the MPC’s meeting next month. However, with the MPC set to see another round of labour market and inflation data released before the June meeting, today’s data doesn’t mean a further rate increase next month is a certainty.
“Inflation should still fall quickly this year as strong base effects continue to come into play for most major inflation categories and falling wholesale energy prices feed through into lower household bills from July. And the indirect impact of energy prices on business costs means lower gas and electricity prices should eventually feed into lower core inflation. But strong wage growth is likely to keep services inflation high throughout this year. As a result, the EY ITEM Club doesn’t expect inflation to return to the Bank of England’s 2% target until well into 2024.”
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below formBy GlobalData