Interest rate expectations have soared to 5.5% following the release of data showing a significant jump in core inflation to a 30-year high.
The headline rate of annual inflation for April was reported at 8.7%, surpassing the expected rate of 8.2%.
Although the April rate represented a decrease from the 10.1% recorded in March, core inflation (excluding food, energy, alcohol, and tobacco) actually increased to 6.8%, exceeding the consensus forecast of 6.2%, compared to 6.2% in March.
Rob Clarry, investment strategist at wealth manager Evelyn Partners, said: “In the week that Andrew Bailey, Governor of the Bank of England, admitted he was no longer relying on the Bank’s inflation models, we receive another unpleasant surprise with April’s inflation release.
“Despite a 1.4% decline in year-on-year inflation compared to March, the headline Consumer Price Index (CPI) has exceeded expectations. More concerning is the fact that core inflation has reached its highest level since March 1992. In last month’s monetary policy committee report, the Bank emphasised that inflationary risks remain tilted to the upside, and once again, this has proven to be true.
“The easing in the annual inflation rate was primarily driven by changes in the housing and household services sector, particularly in gas and electricity. Monthly gas prices fell by 1.0% between March and April of this year. This decline was mainly due to base effects, as the higher April 2022 Ofgem energy cap was excluded from the annual estimates.
“However, this decline in prices was partially offset by upward effects in recreation and culture, alcoholic beverages and tobacco, communication, and transport. Additionally, we witnessed another significant increase in food and non-alcoholic beverage prices, which rose by 1.4% month-on-month and 19.1% year-on-year. According to the Office for National Statistics (ONS), this is the second-highest reading in the past 45 years.
“In response to this disappointing data, bond markets immediately reacted by raising expectations of the peak in UK interest rates from 5.0% to around 5.5%. Sterling also extended its recent gains, rising by 0.4% against the dollar.
“As we highlighted last week, the Bank of England’s decision on whether to continue its rate-hiking cycle will depend on incoming data. The latest CPI figures increase the likelihood of another rate increase at the June Monetary Policy Committee (MPC) meeting.
“This was yet another disappointing inflation report for the Bank of England. With core inflation at a 30-year high, we now anticipate another rate hike at the June MPC meeting.”
