Headline UK inflation was down to 8.7% in April, a drop of 1.4 basis points from the previous month, but experts agree that this won’t be enough to reverse the Bank of England’s tight monetary stance. In fact, quite the opposite.
According to the latest Consumer Price Index (CPI) reading released this morning, core CPI, which excludes energy, food, alcohol and tobacco, rose by 6.8% in the 12 months to April 2023, up from 6.2% in March – the highest rate since March 1992 – leaving inflation “nowhere near where it needs to be”, according to Myron Jobson, senior personal finance analyst at interactive investor.
“The sharp fall and return to single-digit headline inflation is a positive development but somewhat of a false dawn, as food and non-alcoholic beverage prices remain near 45-year high,” he said.
“The slowdown in the headline figure may not continue, since a large chunk of it is attributable to a significant drop in fuel prices, which might not be sustained. Stubborn and sticky inflation in other key areas of expenditure, like food, could persist for longer before coming down.”
According to interactive investor, the UK lost £153bn to inflation over a two-year period to March 2023, averaging £5,455 per household.
“While Britain appears to be past the worst phase of the biggest spike in inflation in generations, the road back to normal is a long, winding and uncertain one. As such, many of us will remain in budgeting mode as heightened costs continue to weigh on household budgets,” concluded Jobson.
To add salt to the wound, experts agreed that this will leave the Bank of England no choice but to continue on its hawkish stance.
Danni Hewson, head of financial analysis at AJ Bell: “With core inflation heading the wrong way, it sets the scene for at least one more interest rate hike and looking at market expectation this morning it seems there’s speculation the Bank of England might go as high as a 5.5% base rate in order to complete its task,” he said.
“It will be a relief to many that the UK economy has proved more resilient than expected, including the IMF [International Monetary Fund]. But that resilience may come at a cost as it may have provided the exact conditions that inflation needed to creep insidiously into the economic fabric.”
Some were more optimistic but agreed that it will not be a swift road to recovery. Rob Morgan, chief investment analyst at Charles Stanley, remained positive that inflation will be tamed eventually.
“While the battle with inflation will be won, it will likely be a long and arduous one, as central bankers’ credibility is at stake,” he said.
“Like other major central banks, the Bank of England is near the end of its interest rate hiking cycle but will likely maintain tight policy for the remainder of the year, meaning no significant rate cuts until 2024.”
As to what this means for investors, Morgan noted there had been a recent rise in government bond yields, which was indicative of a leaning towards higher and longer-lasting inflation than previously anticipated.
“The 10-year gilt yield is presently around 4.1% having started the year at around 3.6%. This is keeping a lid on asset prices across the board as investors try to factor in the appropriate level of inflation and interest rate risk,” he said.
“All else being equal, higher inflation and interest rates to combat them is negative for most asset prices as investors require a higher rate of return, implying a lower starting value.”