Please see below Evelyn Partners thoughts on this morning’s UK inflation announcement for April.
What happened?
UK April annual headline CPI inflation came in at 3.5% (consensus: 3.3%), versus 2.6% in March. In monthly terms, CPI was up 1.2% (consensus: 1.0%), compared with 0.3% in March.
Annual core CPI inflation (ex-energy, food, alcohol and tobacco) came in at 3.8% (consensus: 3.6%) vs 3.4% in March.
What does it mean?
An acceleration in UK CPI inflation for April was expected, driven by a triple-whammy of:
i) Large indexed and regulated price increases, including mobile phone charges, vehicle excise duty, and water & energy bills.
ii) A later-than-usual Easter weekend, which lifted airfare and accommodation prices.
iii) Businesses passing on the higher National Minimum Wage and employers’ National Insurance (NI) contributions to consumers.
Looking forward, it is unclear whether businesses can fully pass on higher labour costs to consumers through price increases. Given tight margins in the retail sector, food retailers are likely to pass on these costs, adding further complexity to the BoE’s Monetary Policy Committee (MPC) to make decisions on inflation and interest rates.
The Bank of England forecasts annual CPI inflation will average 3.4% in Q2 and peak at 3.5% in Q3. If inflation exceeds expectations, the MPC may delay interest rate cuts at its next meeting on June 19. In its May meeting, the MPC did not signal urgency to cut rates.
However, if services CPI inflation slows and pay growth eases, alongside a slightly rising unemployment rate, the BoE may resume rate cuts in the second half of 2025.
Bottom Line
Faster UK inflation is likely to encourage the BoE to maintain a slower pace of interest rate cuts. This should provide some upside to the sterling exchange rate against the dollar.
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Charlotte Clarke
21/05/2025