Expectations for a Bank of England rate cut in June have been dampened by a smaller-than-anticipated decline in UK inflation in April
Consumer prices in Britain rose by 2.3% year-on-year in April, a significant decrease from the 3.2% increase in March, marking the lowest rate in nearly three years (the CPI was 2.0% in July 2021). However, this rise fell short of the expected 2.1% increase.
Month-on-month inflation rose by 0.3% in April, down from a 0.6% increase in March, but still higher than the forecasted 0.2% increase.
Core inflation, excluding the most volatile components like food, energy, and tobacco, increased by 0.9% month-on-month in April, compared to a 0.6% rise in March, exceeding the consensus forecast of a 0.7% increase.
On an annual basis, core CPI slightly decreased from 4.2% in March to 3.9% in April, which was higher than the expected 3.6% increase.
Services inflation, the Bank of England’s key measure of domestic price pressures, edged down to 5.9% from 6.0% in March, contrary to economists’ expectations of a 5.5% rise.
The smaller-than-expected drop in overall inflation, persistently high core measures, and higher-than-anticipated services inflation send negative signals and darken the outlook for a rate cut in June. This disappointing data also negatively affects Prime Minister Sunak’s position ahead of this year’s election.
The Bank of England’s position weakened after the latest data, which pushed it further from its goal of bringing inflation back to the 2% target. This data hurt the chances of a rate cut in June, as policymakers are concerned that wage growth could further fuel inflationary pressures, despite mixed recent data from the UK labor sector.
Although the latest UK CPI data show that Britain has a lower inflation rate than the United States and several other G7 countries, it still ranks poorly among Western economies in terms of inflation performance over the past few years.
The British pound jumped to its highest level in two months against the US dollar in immediate reaction to the economic data. This boosted the hawkish stance and revived the prospect that British policymakers might maintain the current policy in June.
The cable breached an important technical barrier, though a sustained break is needed to confirm a fresh positive signal for the continuation of a larger uptrend.
