UK inflation for April soared but came below market expectations, pushing the pound lower. UK headline CPI inflation rate printed at 9.0% year-on-year, which is below the 9.1% the market was expecting, but up from March’s 7.0% reading.

UK inflation is now at its highest level for more than 40 years due to the rising costs of gas and electricity which have pushed household energy bills higher after the rise of the Ofgem price cap in April. The next lift to energy prices will come in October when UK inflation is expected to reach close to 10%, according to the Bank of England.

UK inflation data

CPI inflation rose 2.5% month-on-month in April said the Office for National Statistics (ONS), higher 1.1% previously, but lower than the 2.6% the market was expecting. Core CPI rose 6.2%, but this was in line with the market's expectations. Month-on-month core rose 0.7% which was below expectations for 0.8%. The data is not a big surprise and won't alter market expectations for future Bank of England rate hikes.

Higher consumer prices

The rising cost of food and transport has pushed prices up, worsening the cost-of-living crisis. Not only households have faced the burden of rising costs but also businesses which are suffering from higher energy and fuel costs.

The ONS said the 54% increase in the energy price cap in April was the main reason the consumer prices index rose to 9%. Average petrol prices rose to 161.8p a litre in April with the average cost of diesel at the pumps hitting 176.1p a litre.

Prices at restaurants and hotels rose after the end of a temporary VAT cut for the hospitality industry.

The pound has weakened since last month adding more pressure on businesses as the cost of imports rose. Businesses are also experiencing a shortage of skilled workers, which combined with higher prices, could push the economy into recession, economists have warned.

The British Chambers of Commerce has called for the Chancellor Rishi Sunak to hold an emergency mini-budget, as inflation is damaging consumer spending and business investment, and the UK could enter a recession by the third quarter of the year.

The Chancellor has said he may support those on the lowest pay but the cabinet is divided over how to fund the billions of pounds that are said to be needed in extra subsidies or welfare payments, with some members being in support of a windfall tax on oil and gas companies.

Bank of England

The 9.0% rise in April’s consumer prices is in line with the BoE’s latest estimate and is not expected to change the Bank’s near-term guidance, as two more 25bp rate hikes this year are still priced in by markets. Bank of England policymakers will provide their feedback to the numbers at their meeting in June and markets expect a rate rise for the fourth time since last December to 1.25%.

However, economists are not sure how much further the Bank will go to raise interest rates, with some saying that it will raise rates twice before pausing.

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