UK inflation sticks above 10%, lifting prospect of rate hike

BRITAIN’S inflation rate remained stubbornly high in the double digits in March, another surprisingly strong reading that will strengthen the case for more interest-rate rises at the Bank of England (BOE).

The Consumer Prices Index (CPI) rose 10.1 per cent from a year ago, driven by the strongest increase in food prices in more than four decades, the Office for National Statistics (ONS) said on Wednesday (Apr 19). Economists had expected a slowdown to 9.8 per cent.

Investors quickly moved to price in further rate hikes from the BOE, continuing the quickest tightening cycle in four decades. Policymakers led by governor Andrew Bailey had signalled a pause was possible if inflationary pressures subsided, but today’s reading suggests that prices in the UK have more momentum than in the US or eurozone.

Money-market traders priced a peak BOE interest rate of more than 5 per cent this cycle, the highest this year. They also expect two consecutive 25-basis-point increases in May and June, based on swaps tied to the meeting dates.

The pound edged higher against the US dollar and gilts fell as the market adjusted to the prospect of steeper rate increases. Sterling jumped as much as 0.4 per cent to US$1.2469 while the yield on two-year notes rose 13 basis points to 3.82 per cent.

“The Bank of England’s job is not yet done,” said Kitty Ussher, chief economist at the Institute of Directors. “To address the underlying issues, the (Monetary Policy Committee) still needs to raise rates again when it meets in a few weeks’ time.”

Britain’s inflation rate retains more momentum than prices in the US and Europe, where CPI has been drifting down for months. In the US, prices rose 5 per cent in March, the slowest in almost two years. In the eurozone, CPI for last month eased to 6.9 per cent, the lowest since February 2022.

Inflation in the services sector remained 6.6 per cent, while food and non-alcoholic beverages jumped 19.1 per cent, the most since 1977.

Grocery bills continued to spiral higher, with food and non-alcoholic drink price inflation hitting a 45-year high of 19.1 per cent. The ONS said it was driven by record increases in costs for bread, hot beverages, chocolate and confectionery.

Both core inflation – which excludes food and energy prices – and services price growth remained stable in March at 6.2 per cent and 6.6 per cent respectively. The two indicators of underlying inflation are being watched closely by BOE policymakers, with services seen as a proxy for wage pressures in the economy.

“The main drivers of the decline were motor fuel prices and heating oil costs, both of which fell after sharp rises at the same time last year,” said ONS chief economist Grant Fitzner. “However, these were partially offset by the cost of food, which is still climbing steeply, with bread and cereal price inflation at a record high.”

Prime Minister Rishi Sunak made cutting inflation in half by the end of the year one of his five key promises as he battles to restore his Conservative Party’s standing in the polls.

“These figures reaffirm exactly why we must continue with our efforts to drive down inflation, so we can ease pressure on families and businesses,” said Chancellor of the Exchequer Jeremy Hunt. “We are on track to do this.”

The BOE is considering whether it can pause its quickest tightening cycle in four decades, anticipating inflation will fall sharply the rest of this year.

However, the rate-setters face a balancing act after resilient wage growth reported on Tuesday added to fears that UK inflation will persist. Earnings excluding bonuses climbed 6.6 per cent in the three months to February, even as unemployment edged up and vacancies declined.

It is now “highly likely” the BOE will push ahead with another quarter-point rate hike on May 11, said Hugh Gimber, global market strategist at JP Morgan Asset Management. “The Bank of England is still a long way away from being able to feel comfortable that price pressures are under control.”

However, there were some signs of price pressures easing. Factory gate price inflation cooled significantly in March, suggesting some relief is in the pipeline. Producer input costs rose 7.6 per cent, down sharply from 12.8 per cent, while output prices also moderated substantially.

The cooling suggests that the easing in global supply-chain pressures in recent months are now feeding through to factories.

“Prices continue to rise at an alarming rate,” said David Bharier, head of research at the British Chamber of Commerce. “More positively, today’s figures show that the Producer Price Index has eased to 7.6 per cent from 12.8 per cent, indicating the peak may have passed for input price growth.” BLOOMBERG