UK inflation dropped sharply to 8.7 per cent in April, but the much smaller fall than the Bank of England expected will add to pressure on the central bank to keep increasing interest rates.
The BoE expected consumer price inflation to drop from 10.1 per cent in March to 8.4 per cent in April as last year’s energy price rises fell out of the annual comparison.
The figures will also add to the difficulties facing Andrew Bailey, BoE governor, who admitted on Tuesday that the bank’s economic model had not been accurate and there were “very big lessons to learn” on the management of high price rises.
While the headline rate of inflation is likely to decline further as gas and electricity prices fall this year, the jump in the core inflation rate from 6.2 per cent to 6.8 per cent over the same period suggests there is more underlying inflationary pressure than hoped.
Yael Selfin, chief economist at KPMG UK, said that “inflationary pressures remain sticky”.
Paul Dales, chief UK economist at Capital Economics, said that although the drop in the headline rate was welcome, “much more important was the worrying large rebound in core inflation”.
This, he said, contradicted expectations of a small drop in underlying price pressures and suggested, “the recent resilience of economic activity appears to be stoking domestic inflationary pressure”.
The BoE has said that it would raise interest rates again if there were signs of persistence in inflation.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the figures greatly exceeded expectations and were likely to prompt the central bank’s Monetary Policy Committee to act again. There was “too small a drop [in inflation] for the MPC to stop hiking in June,” he said.
The ONS said that the stability in energy prices this year compared with large rises last year explained the drop in the main rate, but it was offset by substantial increases in the prices of second-hand cars and cigarettes.
Food price inflation remained close to 45-year peaks, at 19.1 per cent in April compared with 19.2 per cent in March.
Grant Fitzner, chief economist at the ONS, said: “Prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”
Kitty Ussher, chief economist of the Institute of Directors, said that the figures were concerning, but there was still a chance that the fall in the headline rate of inflation would change sentiment among companies setting prices and wages.
“Policymakers will hope that now that the headline rate is back to single digits, expectations of future inflation will now start to fall as well, which then could become self-fulfilling,” she said.
The UK’s inflation rate will now compare unfavourably with those in other large economies being higher than the US, France, Germany and the EU average.
In the month of April alone, UK prices rose 1.2 per cent at a time when gas and electricity bills were frozen. There was an 8 per cent rise in the communications component of inflation as mobile phone companies increased charges, often linked to the inflation rate.
There was another 1.4 per cent increase in food prices, the same rise in rents and package holidays over the month and a 6 per cent rise in postal costs.
