Utility bills and tax hikes drive inflation higher
All the arrows are pointing in the wrong direction.Inflation rose significantly in April on every measure, as prices increased more rapidly across the UK economy.The headline annual rate jumped to 3.5%, above the 3.3% economists expected and higher than the 3.4% forecast by the Bank of England.The rise was driven by higher food and energy prices, but core inflation — which strips out both — also climbed, reaching 3.8% last month.Inflation in the services sector, which the Bank monitors closely as a guide to domestic price pressures, increased to 5.4% — a clear signal that wage growth is strong, broad-based, and persistent.That might sound like good news. But the Bank worries that firms are covering the cost of higher wages by raising prices — fueling a fresh round of inflation.
We knew energy and water bills would rise sharply last month, so a rebound in inflation wasn't a surprise. But the key question now is why the rebound was bigger than expected and whether it will last.'This was more than an energy and water story,' says Paul Dales at Capital Economics.
He notes that prices for mobile phone and broadband contracts, restaurant meals, vehicle excise duty, package holidays and airfares all rose more than he forecast. Food prices also climbed strongly.The British Retail Consortium, which represents major supermarkets, blames the Chancellor. The October Budget raised business costs through a higher minimum wage and an increase in national insurance.Retailers say those costs have now been passed on to consumers - and they're reminding the government that they warned this would happen.
The Bank of England predicted the Budget would push up inflation. It's possible, though not yet certain, that firms have responded by raising prices more aggressively than the Bank assumed.The Chancellor says she is 'disappointed' by the latest inflation data and acknowledges that 'cost-of-living pressures are still weighing down on working people.'Energy bills are the biggest upward force but that pressure may ease soon. Oil prices have fallen significantly since President Trump started his tariff war in earnest. Anyone with a car has likely felt the effect at the pump.
Still, a second wave of inflation is buffeting the UK. There's no expectation prices will take off in the way the did from July 2021, but the Bank thinks headline inflation will stay above 3% for several months, peaking at 3.7% in the autumn before gradually easing.That will be uncomfortable for many households and painful for those on the lowest incomes.It's also bad news for anyone hoping for cheaper borrowing. Just yesterday, markets were pricing in two interest rate cuts over the next 12 months. This morning, they're betting on just one.
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