Quick Look:
- UK inflation hits a 13-month low at 2.4%, unexpectedly driven down by lower airfares.
- Bank of England may delay rate hikes, with shifting odds now favouring a rise by August.
- Economic signs mixed, with factory costs up but pound strength and job market stability noted.
In a surprising turn of events, British inflation fell to a 13-month low this April, recording an annual change of just 2.4%. This unexpected drop was influenced by significantly lower airfares, attributed to the timing of the Easter holidays. The Bank of England (BoE) had anticipated ease in inflation for April. However, economists were bracing for the figures to hold steady at 2.5% or possibly rise following another unexpected decline in March.
James Smith, an economist at ING, commented on the prevailing economic conditions, suggesting that with consumers showing caution and borrowing significantly decreased, it’s uncertain whether there will be a rate hike in the upcoming months. This sentiment came shortly after the BoE refrained from raising interest rates two weeks before April, a decision influenced by the need to assess the impact of heavy snowfall on the economy’s sluggish start to the year.
Looking forward, investors are now estimating a one-in-three chance of the BoE increasing borrowing costs by August, a significant adjustment from the previously even odds earlier in the week.
Inflation Concerns Rise Despite Recent Drop to 2.4%
Inflation peaked at 3.1% in November of the previous year, primarily due to a drop in the pound post-Brexit vote. More recently, BoE Governor Mark Carney raised concerns last Tuesday that new factors, such as the sugar tax on soft drinks, higher utility bills, and rising petrol prices, could push inflation upwards in the forthcoming months. Despite these concerns, the overall impact of rising soft drink prices has been minimal on inflation rates.
The slowing of inflation isn’t confined to the UK alone; the Eurozone also reported a slowdown in inflation last week, indicating a potential trend across regions.
Domestically, the cost of goods leaving factories and the price of raw materials rose unexpectedly in April. Raw material prices were 5.3% higher than in April 2017, a significant increase from the 4.4% rise the previous month. This could signify upward pressure on future inflation rates.
UK Economic Outlook: Inflation Dips, Job Market Stabilizes
In March, the UK’s inflation rate was 3.2%, with economists initially expecting a 3.1% rate. The labour market remained stable, with the unemployment rate at 4.2% from December to February. However, wage growth, excluding bonuses, has seen a slight decrease.
Governor Carney also hinted at potential monetary policy shifts, with market expectations now leaning towards a potential first Bank of England rate cut to occur between September and November instead of June.
Political and Market Optimism Following UK Inflation Report
UK Finance Minister Jeremy Hunt shared his optimism on platform X, calling recent inflation data “welcome news.” The announcement comes as the UK prepares for a national election later this year. The British pound has risen, gaining 0.3% against the USD and 0.2% against the EUR. This uptick indicates a cautiously positive response from currency markets to the latest economic reports. The UK faces complex financial times, alerting stakeholders for signs of shifts in economic policy or new impacts on inflation.