Closing summary: Inflation data shock raises prospect of higher UK rates
Bank of England governor Andrew Bailey does not think the UK is in a wage-price spiral, he said today. But the inflation surprise this morning has given watchers of the British economy plenty to think about.
UK consumer price index inflation dropped to 8.7%, the lowest since March 2022, but that was still higher than the average expectation of 8.2% in a poll of economists. Core inflation – which strips out volatile food, drink, energy and tobacco – actually rose, while food price inflation remained at 19%, near 45-year highs.
That pushed up expectations of further interest rate increases among financial market participants. Interest rate swaps suggested that rates are more likely than not to rise to 5.5% in November.
UK financial markets have certainly adjusted to the prospect of higher rates – which would likely lead to less economic activity and lower profits. The FTSE 100 has dropped by 1.9% today with under an hour of trading remaining, while the FTSE 250 index of mid-sized companies has dropped by 1.6%.
On bond markets, the yield on 10-year gilts (UK government debt) has risen significantly to 4.3%, its highest level since the response to the disastrous mini-budget helmed by Liz Truss and Kwasi Kwarteng.
Andrew Sentance, a senior adviser at Cambridge Econometrics and a former member of the Bank’s monetary policy committee, expects high rates in the UK for a long while yet. He said:
We are still not on top of inflation in the UK, as I have warned for some time. Markets now expecting UK Bank Rate to peak at close to 5.5 percent, but could still go higher if evidence of strong underlying inflationary pressures persists. https://t.co/OPmla75Ukk
— Andrew Sentance (@asentance) May 24, 2023
In other business news from today:
Strong sales of dresses, denim and office wear as well as more affordable food helped lift sales and profits at Marks & Spencer in the past year despite the effects of inflation on its business and customers.
Severn Trent has increased its dividend to more than £260m, despite growing public anger over payments made by water suppliers to their shareholders and executives.
A ballot of Royal Mail workers on a deal struck last month to end a bitter dispute over pay, jobs and working conditions has been suspended as the row between the postal firm and its union threatened to reignite.
SSE has set out plans to invest £40bn in clean energy over the next 10 years as it reported a near-doubling of its annual profits compared with the year before thanks in part to its fossil fuel power stations.
Virgin Orbit, the satellite launch company founded by British billionaire Richard Branson, will permanently cease operations, just months after a major mission failure.
You can continue to read our live coverage from around the world:
In the UK, Boris Johnson claims the publication of the Covid inquiry ruling unfairly implies he is holding back documents
In the US, Ron DeSantis is to kick off well-funded campaign to become the next US president
In our coverage of Russia’s invasion of Ukraine, the Russian ministry of defence says Ukraine made unsuccessful attack on Black Sea fleet reconnaissance ship
The UK is set to win a battle against Spain to attract a new battery “gigafactory” to be built by Jaguar Land Rover owner Tata, the BBC has reported.
Indian conglomerate Tata has been openly weighing up two possible locations for a battery factory to supply Jaguar Land Rover, Britain’s largest carmaking employer, amid lengthy negotiations with governments for support worth hundreds of millions of pounds.
The threat of losing the factory to Spain has prompted the UK government to bow to intense pressure and offer financial support worth £500m for the plant. Many in the auto industry believe the project is vital to retain a meaningful car industry in the UK as it transitions to electric vehicles – although some analysts suggest this is not the case.
Tata’s chairman, Natarajan Chandrasekaran, is scheduled to meet Prime Minister Rishi Sunak mid-next week, the BBC reported. It said:
Sources familiar with the matter say that although the deal has yet to be signed, engagement has moved from negotiations to drafting and choreography of how the landmark agreement will be presented.
A key part of the support on offer for the gigafactory is help with energy costs. Batteries require large amounts of energy to produce, and the UK has higher costs than much of the rest of Europe.
The UK government has already offered Tata, which also owns UK businesses including Tetley Tea, a £300m package to help upgrade and decarbonise its Port Talbot steelworks facility in south Wales.
More than 100 climate activists are still being detained following a peaceful protest at Europe’s largest private jet trade fair in Geneva on Tuesday.
The demonstrators on behalf of Greenpeace, Stay Grounded, Extinction Rebellion and Scientist Rebellion were arrested at Geneva Airport after chaining themselves to private jets in protest against the sector’s carbon emissions.
Sandy Bouchat, spokeswoman for the Geneva airport, said the protest forced the airport to temporarily shut to both outbound and inbound flights for about an hour for security reasons. Seven flights were diverted and others were delayed.
The activists said they did not enter the taxiways or runways of the airport and did not intend to disrupt commercial air traffic.
Updated
Andrew Bailey: City focus on safe assets holding back growth-boosting investments
Bank of England governor Andrew Bailey has waded into a growing debate over the ability of British companies to secure investment in the City of London, amid concerns over a lack of productive investment by financial firms.
It comes as City bosses warn regulatory reforms are required from the government, as the UK risks falling behind other global financial centres after Brexit.
Saying that “sensible” regulatory reforms to encourage risk taking by firms were required, Bailey warned: “If we don’t do that I think we’ve got a problem on our hands, going back to the point about the potential growth rate of the economy.”
The Bank’s governor said one potential reason holding back risk-taking investment in British firms was the prevalence of small pension funds in the UK. “The problem with that world is the economies of scale,” he said at an event in London held by the Wall Street Journal. “[The UK] has probably become too focused on relatively low-yielding assets.”
“I think we’ve got to think about what is the right structure and operating model for that world to get the right balance between saving, risk taking and productive investment.”
Immediately after Bailey on the panel, Legal & General chief executive Nigel Wilson welcomed his comments about the UK pension system – and also highlighted a more general problem with developing promising research into larger businesses.
We have a disproportionately large pension system in the UK, but we’re not directing it to the right place.
Relatively speaking we have the best IP in the world… In terms of the R in R&D [research and development] I’d give us an A*; in terms of the D I’d give us a D.
No inflation spiral
Bailey also suggested it is too soon to know if the government will meet its target of halving inflation this year.
Speaking at an event in London hosted by the Wall Street Journal, the Bank of England governor said forecasts made by the central bank earlier this month showed that Rishi Sunak was on track to meet his central economic goal.
However, asked whether April’s inflation figures changed the dynamic, he added: “I think we’ve obviously got to see how the news and the evidence unfolds.”
The Bank’s governor warned headline inflation was taking longer than expected to fall back to sustainable levels amid the impact from soaring food prices. “I have to say it is taking longer, and it is higher that was expected certainly earlier this year.”
Bailey dismissed the idea that Britain was experiencing a wage-price spiral, when workers demanding higher pay settlements adds to inflationary pressure. However, he warned that pay deals were contributing to the “stickiness” of the UK’s highest inflation rate in decades.
I don’t think spiral is the right word to use. That gives you a connotation of things that are marching upwards. It’s the stickiness downwards and the question of how fast is it going to come down.... Bear in mind that we’ve got a very tight labour market in this country.
Bank of England governor: UK not in a wage-price 'spiral'
Bank of England governor Andrew Bailey has said the UK is not in a wage-price “spiral”, in an interview on inflation on Wednesday.
Bailey said that he does not think “spiral” is the right word to use, when asked about core inflation and wages at an event run by the Wall Street Journal.
It was too soon to know if the government’s goal of halving inflation this year had been put in peril by today’s surprisingly high inflation reading, he said. Inflation at 8.7% was higher than the 8.2% expected by economists, although Bailey said it was still a welcome decline from above 10%.
However, food inflation is taking longer to fall than expected, he said.
Shares in Embracer, the gaming group with rights to Lord of The Rings, The Hobbit and Tomb Raider, plunged more than 40% after the company said a $2bn partnership had fallen through.
The publicly-listed Swedish gaming giant, which had been valued at more that $4.6bn (SKr49.19bn), plunged 44% as the company slashed its earnings forecast for the year as a result.
The company, which has spent billions snapping up gaming studios and valuable intellectual property in the last few years, said that it was informed on Tuesday that a strategic partnership it had been negotiating for seven months that would deliver $2bn in revenue over six years “will not materialise”.
Lars Wingefors, chief executive at Embracer, said:
It has been a challenging year, adversely impacted by game delays, weaker consumer demand and lackluster reception for certain notable releases. Late last night, we were informed that one major strategic partnership that has been negotiated for seven months will not materialise.
As a result, Embracer said it now expects to generate SKr7bn ($658mn) to SKr9bn in adjusted earnings before interest and tax in the current financial year, down from SKr10.3bn to SKr13.6bn. “In as far as failure to conclude deals go, a ‘miss is as good as a mile’, and unfortunately, this is what Embracer has delivered,”said Thomas Singlehurst, analyst at Citi. “We would hope this will be a clearing event.
Deliveroo workers have staged a protest outside the takeaway delivery company’s annual meeting in London calling for higher pay.
The company has faced a long-running campaign by workers represented by the Independent Workers’ Union of Great Britain (IWGB) for higher pay, although it last year agreed a deal with another union, the GMB.
From a corporate point of view Deliveroo’s meeting passed off without a hitch: it received 97% or more of the votes for every shareholder resolution.
Press Association was at the protest and spoke to some riders. It reported:
Joe Durbidge, 31, who has worked for Deliveroo for four and a half years, told the PA news agency on Wednesday he has worked 50-hour weeks and been paid around as little as £2.90 per delivery. “Conditions are deteriorating constantly but my fees have never gone up since I started,” he said. “Nobody’s satisfied with the job. It’s crazy. “It’s very hard work, it takes a lot out of you and it’s hard to make a living.
Riders are protesting outside @Deliveroo’s AGM NOW
— IWGB (@IWGBunion) May 24, 2023
A billion in the bank whilst riders get a minimum of £2.90 a job
FAIR PAY NOW 📣📣📣#SHAMEONDELIVEROO#SHAMEONSHU pic.twitter.com/mnr5i9uhyL
Ahead of the meeting, a Deliveroo spokesperson said:
Deliveroo offers riders flexible work, attractive earning opportunities and security while they work. We see thousands of applications from people wanting to be riders each week, high satisfaction rates and very strong retention rates of those who sign up. We work closely with riders to make sure the work we offer reflects what they tell us they value.
Postal workers' union delays vote on deal with Royal Mail
The main postal workers’ union has said it will not put an agreement with Royal Mail to its members for confirmation until the company stops “attacks” on its members.
The Communication Workers Union (CWU) on Wednesday said it will suspend the previous timetable for a member vote until it is satisfied.
Royal Mail agreed a new deal with the union in April after months of hard-fought and often acrimonious negotiations. Royal Mail blamed the strikes for a £1bn loss reported last week, and Simon Thompson resigned earlier in the month.
In a letter to its members, Dave Ward and Andy Furey, the union’s general secretary and his deputy, wrote:
The position reached with Royal Mail Group is the right agreement for this moment in time. Set against the most brutal dispute in our history, a self-inflicted but very real financial crisis for the company and jointly agreed need for change, this agreement will secure the future of the company, jobs, and the service.
However, what has become clear is the environment we are attempting to deliver this agreement in remains toxic.
The CWU said it still backed the deal, but wanted Royal Mail to bring in “immediate measures” to “restore quality of service”. That would likely include steps to address missed delivery targets highlighted this month by Ofcom, the regulator.
The union also wanted a “mass zoom meeting” between the company and every CWU representative, and for the company to give every branch their proposed finishing times.
Royal Mail Group National Agreement - ballot timetable suspended.
— The CWU (@CWUnews) May 24, 2023
We will put the agreement out to vote - but only when Royal Mail stop their attacks on our members.
Full info: https://t.co/3a6bdFRegg
The FTSE 100 is now down 1.75% for today. That has pushed it to its lowest since early April, at one point hitting 7,621 points, its lowest since the end of March.
Housebuilders are still at the bottom of the pile for London’s benchmark index today. Higher interest rates are likely to dampen demand for houses – even if big price decreases are unlikely given the long-running lack of new supply.
Of the housebuilders, Persimmon lost 5.3%, Taylor Wimpey lost 5.1%, Barratt Developments lost 4.9% and Berkeley Group lost 4.2% at the time of writing.
The pound is also down by 0.2%. A fall in sterling usually helps to ease the pains of the FTSE 100, but it won’t make up for the bigger dent in company profits if interest rates are tighter.
The UK’s competition watchdog has provisionally found that five major banks broke competition law by unlawfully exchanging sensitive information about British government bond trading in online chatrooms.
In an investigation, the Competition and Markets Authority has found that the banks – Citi, Deutsche Bank, HSBC, Morgan Stanley and Royal Bank of Canada – shared competitively sensitive information on pricing and aspects of their trading strategies through multiple one-to-one online chats.
These discussions could have prevented taxpayers, savers and other financial institutions from getting the full benefit of competition for these products, according to the CMA.
In the aftermath of the global financial crisis, and at varying times between 2009 and 2013, a small number of traders working at the banks exchanged information in chatrooms on Bloomberg terminals relating to the buying and selling of UK government bonds, commonly referred to as gilts, according to the CMA.
You can read the full report here:
Bailey did not address anything to do with inflation or interest rates during his brief speech – although we must surely expect that later in a “fireside chat” (not this reporter’s favourite term for an interview) about “inflation and the economy”.
Today’s inflation surprise should certainly make for some good questions.
This chart from the Bank of England’s latest monetary policy report shows what markets expected for the path of interest rates at the end of April. You can see the turquoise line for the UK’s bank rate peaking well below 5% later this year and then dipping.
For comparison, here is a table from data company Refinitiv which shows what markets now expect. Bear with me: each number in blue in the below is the implied probability (assigned by financial market) that the Bank of England’s main interest rate will hit the number at the top. Circled in red you can see that there is a combined probability of just over 50% that bank rate will be 5.5% or even 5.75% by November.
The upshot is that markets now expect interest rates to peak 0.5 percentage points higher than they did at the end of last month. That will mean a whole lot more pain for mortgage holders and other borrowers – and could choke off growth in the broader economy as businesses find borrowing more expensive.
Andrew Bailey says the financial sector still has some way to go before it understands the full impacts of the transition to a net zero economy.
It is important for financial markets to play their part and “phase out assets that are not aligned to net zero in a controlled way”, he says.
He says:
This is important, because it’s actually about risks to our economies today.
Bank of England governor Andrew Bailey has said that green transition investments can help to raise growth in rich, industrialised countries such as the UK.
The Bank is interested in the climate crisis because of the “greater occurrence of extreme weather events”, the potential effects on financial stability, and the role of the financial sector, he said, speaking at a net zero conference hosted by the City of London Corporation.
“The underlying rate of economic growth in industrialised countries has fallen. It’s true here,” he said, but investments in green technology can “help to raise the potential growth rate of the economy”.
Germany businesses are getting more pessimistic, according to an indicator closely watched by economists.
The Ifo Institute’s longstanding survey index slid to 91.7 points in May, from a revised 93.4 in April, well below the consensus expectation of 93.
UK bond investors are scrambling to readjust to this morning’s surprise inflation data. Very few economists were expecting it to come in quite so high.
UK bond yields (which move inversely to prices) have risen sharply as investors sold. The yield on 10-year UK government bonds (known as gilts) rose above 4.3% on Wednesday, up from 4.2% on Tuesday.
That was the highest level for the 10-year since October 2022, when a certain Liz Truss was in power. The disastrous “mini-budget” delivered by her former chancellor Kwasi Kwarteng prompted 10-year yields to surge above 4.6%.
The yield dropped back to below 3% after Rishi Sunak and Jeremy Hunt were installed by a stricken Tory party. But yields have crept up over the last three months as inflation has hung around. The 10-year yield started the week below 4%.
Higher interest rates tend to mean the stable earnings from bonds are less valuable, so bond prices fall and yields rise.
Meanwhile the pound has given up all of its previous gains. It is now down by 0.04% against the US dollar for the day at $1.2405.
Usually higher interest rates also make the local currency more attractive. But that only works up to a point. If rates rise too high then traders can start to fear that it will choke off economic growth.
Bloomberg News has some handy analysis:
The pound has undone all of its advance following the inflation data and then some. That’s likely due to traders weighing the prospect of more Bank of England rate hikes – typically positive for the currency – against the economic slowdown that could follow soon after.
Sticking with corporate news for a moment, the share price of Marks & Spencer has surged by 12% in the first two hours of trading after it smashed forecasts.
Marks & Spencer profits have increased by more than a fifth, beating City expectations, with the retailer crediting the rise to improvements to the style credentials of its clothing and more affordable food.
However, the company warned that it faced a challenging year ahead as costs continued to increase. It expects to spend £100m more on staff wages and £50m on energy.
It said those rises would be offset by measures such as more automated tills and the closure of about 20 stores, as already announced, about half of which will be relocated, including new flagship stores in Liverpool, Leeds, Manchester, Birmingham and Thurrock.
You can read the full report here:
Energy firm SSE reports near doubling of annual profits
SSE has reported a near doubling of its annual profits compared with the year before after soaring energy market prices led to a boom for its fossil fuel power plants.
The Perth-based company said its adjusted pre-tax profits climbed to £2.18bn for the 12 months to the end of March, up from almost £1.16bn the year before.
The sharp increase in full-year profits came as earnings from its gas-fired power plants surged almost four-fold to £1.24bn for the last financial year, up from £331.1m the year before.
The company has sought to downplay the soaring profits generated by its gas plants in the wake of Russia’s invasion of Ukraine, which triggered the jump in global energy market prices that has ignited calls for a windfall tax on the excess profits made by power generators and oil companies.
Shares in the company rose by 1.4% on Wednesday morning.
You can read the full report here:
A former member of the Bank of England’s monetary policy committee has said he fears that inflation is becoming “embedded” in the UK economy – particularly in signs that wages are continuing to rise.
Sushil Wadhwani, who is now chief investment officer at PGIM Wadhwani, said the latest inflation data was “incredibly disappointing”, highlighting high inflation in services prices. (Wadhwani is a former member of the Scott Trust, the body that controls the Guardian.)
Wadhwani told the BBC’s Today programme:
The key thing is about these numbers today is not only that they were disappointing today, but they’ve been disappointing for several months. What’s beginning to worry me – and perhaps more importantly to worry the Bank – is that inflation is becoming embedded, that people are expecting inflation to stay high for longer. That obviously a dangerous development.
It would appear that wage growth is staying stubbornly high – understandably, I should say, given how high headline inflation is. But wage inflation is remaining high.
Markets predict 100% chance of Bank of England rate hike in June
The inflation data has meant that a further interest rate hike at the Bank of England’s next monetary policy meeting is guaranteed, according to financial markets at least.
Economics correspondent Richard Partington reports:
Markets are fully pricing in another Bank rate increase of a quarter point in June, with an outside chance of an even bigger half point rise. Markets anticipate the base rate could reach a peak of almost 5.4% before the end of the year, almost a whole percentage point higher than the current level.
You can see what investors are thinking in the below table. The Bank of England’s bank rate rose to 4.5% earlier this month. Derivatives trades show that markets are fully pricing in a further increase on 22 June, with bank rate expected to rise to above 5.35% by December before dropping back.
Key event
The financial market reaction on Wednesday morning has been focused not on inflation falling, but on it falling less than expected – consumer price index inflation hit 8.7% compared to average forecasts of 8.2% from economists.
That has prompted a flurry of buying sterling on currency markets as traders reposition. The bet is that higher inflation persuades the Bank of England to raise interest rates further. That makes sterling more attractive because investors can make higher returns.
You can see the effects in this chart showing the pound’s performance against the dollar overnight. It jumped as high as $1.2465 after the data was released, before dropping back.
At the time of writing sterling was up by 0.15% against the US dollar.
It’s a selling day on the FTSE 100 – likely as traders adjust to the expectation of higher interest rates. The index has dropped by 1.6%.
Only two companies have increased share prices so far today: product testing company Intertek after it reported higher sales, and energy firm SSE, which reported big profits.
The biggest fallers are property companies: Taylor Wimpey, Persimmon, Barratt Developments and British Land are all down by between 3.6% and 4.6%.
Inflation drops but prices of sugar, olive oil and eggs drive steep food price rises
UK inflation dropped to 8.7% in the year to April, the first time it has dropped below 10% since August and the lowest since March 2022.
Yet that steep fall – long expected because of the big increase in energy prices in April 2022 – has not all been happy news. It was less dramatic than expected by economists.
Here is the full report by the Guardian’s Richard Partington:
And core inflation, which attempts to measure the underlying price pressures, actually rose between March and April.
Meanwhile, the politically sensitive increases in food prices were sustained. Food prices rose by nearly a fifth during the year to April. Here are some of the components of that 19% food price inflation:
Sugar 47.4%
Olive oil 46.4%
Eggs 37%
Low-fat milk 33.5%
Cheese and curd 30.6%
Flours and other cereals 30%
Pasta products and couscous 27.7%
Ready-made meals 20.8%
Butter 20.1%
Bread 18.6%
Jams, marmalades and honey 17.9%
Fish 14.2%
Pizza and quiche 11.9%
Fruit 10.8%
James Smith, a developed markets economist at ING, an investment bank, says:
UK inflation has come in higher than pretty much anyone, including members of the Bank of England’s committee, expected in April.
This undoubtedly makes life harder for policymakers and no doubt raises the chance of yet another 25bp rate hike in June.
Instead, it’s food prices that are now the biggest headache. […] Assuming the most recent month-on-month increases in output prices were to continue through the remainder of this year, it implies that food inflation should be back to the 6% area or below by Christmas.
Rachel Reeves, Labour’s shadow chancellor, is focusing on food prices (as did her Conservative counterpart).
The reality of today’s inflation figures are soaring food prices staying high and hitting families hard.
— Rachel Reeves (@RachelReevesMP) May 24, 2023
After 13 years of Tory government, never have people paid so much but got so little in return.
Labour will protect family finances and build our economic security.
But it is the core inflation number that is catching the eye of many analysts.
Inflation falls from 10.1% to 8.7% but…
— Torsten Bell (@TorstenBell) May 24, 2023
- bad news for Bank of England = core inflation rose from 6.2% to 6.8%.
- bad news for families = food price inflation is stubbornly high at 19.1% and moving centre stage in the cost of living crisis
So-so UK #inflation data.
— Julian Jessop (@julianHjessop) May 24, 2023
Good news is that the headline CPI rate fell sharply, from 10.1% to 8.7%, but this was entirely accounted for by the fall in #energy price inflation.
Everything else looking sticky 👇
Core rate excl. food & energy hit a new high of 6.8%, up from 6.2%. pic.twitter.com/6bJgBdSqK8
Inflation is the key theme for this morning’s First Edition newsletter – and its editor, Archie Bland, has been talking to the Guardian’s economics correspondent, Richard Partington, about why the rate has dropped.
It includes this handy explanation of what economists call “base effects” – or why the fact of prices staying the same to a year ago leads to a drop in the headline inflation rate.
“At the start of April 2022, there was a roughly 50% rise in gas and electricity bills when Ofgem increased the price cap,” Richard said. “That was an eyewatering figure. Now the comparison period is with the already high level after that rise happened, so the rate drops.” Sure enough, the ONS said that electricity and gas prices contributed 1.42 percentage points to the fall.
And on the Bank of England’s dilemma:
“The financial markets are expecting the Bank to raise interest rates one more time,” Richard said. “They’re currently 4.5% – the highest rate since 2008 – and the expectation is that they go to 4.75% and then stay there for some time.” This morning’s figures don’t change that expectation: interest rates take some time to filter through into the inflation rate, so it would take a really radical deviation from what was expected to prompt a different course to the one already being plotted out.
The headline inflation rate may be falling, but there are also other signs that the UK is not done with price pressures just yet: core inflation is at its highest since 1992.
Core inflation is a measure closely watched by economists because it strips out the most volatile components of the index – like food, energy, alcohol and tobacco – in an effort to work out the underlying picture.
For the Bank of England, that adds to pressure to keep on raising interest rates to cool inflation.
Paul Dales, chief UK economist at Capital Economics, a consultancy, said:
The smaller-than-expected fall in CPI inflation from 10.1% in March to 8.7% in April (BoE 8.4%, consensus 8.2%, CE 8.0%) means it is now very hard to imagine the Bank of England not raising interest rates from 4.50% to 4.75% in June.
“The bulk of the fall was due to a plunge in utility price inflation,” he noted.
But much more important was the worrying large rebound in core inflation from 6.2% in March to 6.8% in April (consensus 6.2%, CE 6.1%). That took it above what we all thought was the peak of 6.5% in September of last year and to the highest rate since 1992.
Jeremy Hunt has said that food price inflation is still rising too quickly – an acknowledgement of its political importance.
Halving inflation is one of five key targets for the government (albeit one they are almost certain to hit as the effects of previous energy price increases pass through the data).
Hunt, the chancellor, said:
The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast. So as well as helping families with around £3,000 of cost of living support this year and last, we must stick resolutely to the plan to get inflation down.
This chart from the Office for National Statistics shows just how steep food price inflation has been in the last year.
Food price inflation is particularly important because it is keenly felt by poorer households, who spend a greater proportion of their income on essentials.
(Please note that this chart shows the slightly different consumer price index including owner occupiers’ housing costs, or CPIH, which the ONS insists upon using. For now, the Bank of England and others still look at the straight consumer price index, or CPI, from which we are also quoting.)
Food price inflation remains near 45-year high
While the overall drop in inflation will be welcomed, there is limited comfort when looking at food prices: prices for food and non-alcoholic drinks rose by 19% in the year to April.
That was only a marginal drop from the 19.1% rate in March.
The Office for National Statistics’ indicative modelled estimates suggest that the annual rate for food and drink in April 2023 is the second highest seen for over 45 years, when the rate in August 1977 was estimated to be 21.9%.
As expected, it’s energy prices that caused the big drop in annual inflation in the year to April.
The UK’s Office for National Statistics said:
Electricity and gas prices contributed 1.42 percentage points to the fall in annual inflation in April as last April’s rise dropped out of the annual comparison, but this component still contributed 1.01 percentage points to annual inflation.
This time last year, global energy prices had surged after Russia’s invasion of Ukraine. Those price rises are now baked in to the figures, so the headline inflation figure is falling.
UK inflation drops to 8.7%
Newsflash: UK consumer price index inflation has dropped to 8.7%, the lowest since March 2022.
However, that was still higher than the average expectation of 8.2% in a poll of economists. More detail to come.
UK inflation forecast to drop below 10%
Good morning, and welcome to our live, rolling coverage of business, economics and financial markets.
The surge in inflation over the last two years has become a key priority for the UK government. But since peaking at an annual rate of 11.1% in October – a 41-year high – inflation has been dropping back rapidly. Data to be published shortly will show whether price rises have slowed further.
Economists expect the annual rate of consumer price index inflation to fall from 10.1% in March to 8.2% in April, according to a poll by Reuters.
The spike in inflation has two main causes: first, the disruption from the coronavirus pandemic that fouled up supply chains around the world and added costs; and second, Russia’s invasion of Ukraine, which prompted chaos on global energy markets as countries around the world scrambled to find alternatives to Russian oil and gas. For the most part, they were successful, but prices nevertheless rose.
The energy crisis has been a significant contributor to more recent price increases. As the below chart from consultancy Oxford Economics shows, the products that take the most energy to make have been most affected by inflation.
Bank of England governor Andrew Bailey is making not one but two public appearances today. The Bank’s monetary policymakers will have to decide whether falling inflation means they should ease off further interest rates increases, or whether they are still uncomfortable with a rate that will almost certainly be well above their 2% target.
Bailey on Tuesday said he believed that inflation has “turned the corner”, which might suggest that further significant tightening of monetary policy through higher rates might not be necessary. On the other hand, a brighter economic outlook for the UK – recognised by the International Monetary Fund on Tuesday – could give weight to the “hawks” on the monetary policy committee who want higher rates to keep on taming inflationary pressures.
The agenda
7am BST: UK inflation data (April; previous: 10.1% year-on-year; consensus: 8.2%)
9am BST: Germany Ifo business climate index (May; prev.: 93.6 points; cons.: 93)
10:30am BST: Andrew Bailey: speech at Mansion House net zero delivery summit
11am BST: UK Confederation of British Industry industrial trends (May; prev.: -20 points; cons.: -19)
2pm BST: Andrew Bailey: interview on “inflation and the economy”
