Interest rates in focus after surprise UK inflation surge

The Herald Scotland

21-05-2025

The rise in annual CPI inflation, from 2.6% in March, was fuelled partly by the hike in regulator Ofgem's price cap for household gas and electricity, which fed through to higher bills.
There was also a surge in air fares, with the Office for National Statistics flagging the impact of the timing of Easter as it published the inflation data.
And annual inflation in the food and non-alcoholic beverages category accelerated to 3.4% in April, from 3% in March, heaping further misery on hard-pressed households.
Economists polled by Reuters had forecast annual CPI inflation for April would come in at 3.3%.
The outturn of 3.5% is significantly above the target of 2% set for the Bank of England by the Treasury.
The Bank of England's Monetary Policy Committee cut benchmark UK interest rates by a quarter-point earlier this month, to 4.25%. This was the fourth quarter-point cut since the MPC started reducing base rates last summer.
The EY ITEM Club think-tank said: 'Consumer price index inflation surprised on the upside in April, largely due to the scale of rises for regulated and indexed prices and a temporary increase in air fares.'
Mulling the outlook, it added: 'Headline inflation will likely edge up further over the coming months, before easing from the autumn as the contribution from the energy category fades.'
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Weighing the prospects for interest rates, in light of the inflation data, the EY ITEM Club declared: 'Though the Monetary Policy Committee will likely be concerned that April's once-a-year rises in indexed and regulated prices were higher than anticipated, its measure of underlying inflation continued to cool. We don't expect today's data to deter the committee from maintaining its established 'cut-hold' tempo.'
Matt Swannell, chief economic advisor to the EY ITEM Club, observed that 'as expected, the energy category added almost 0.7ppts (percentage points) to the headline rate' of inflation 'after Ofgem's price cap rose by 6.4% on April 1'.
He added: 'However, the…once-a-year price rises for other indexed contracts and regulated prices were larger than expected. There was also an unusually high reading in the air fares category as April's price collection dates coincided with the Easter holidays, unlike in 2024.'
Air fares rose by 27.5% month on month in April, the ONS data showed.
And higher prices for overseas holidays over the Easter period played a part in the recreation and culture category exerting upward pressure on the annual CPI rate in April.
Meanwhile, increases in vehicle excise duty (VED) also pushed annual inflation higher.
Mr Swannell said: 'Today's data offers mixed messages for the MPC. On the one hand, April's readings for headline and services inflation overshot the committee's latest staff forecasts, and the larger rises for services prices that only change on an annual basis mean higher inflation is now baked into these categories for another year.
'But, on the other hand, the MPC's preferred measure of underlying services inflation continued to cool in April. On balance, we expect the MPC to continue cutting interest rates at every other meeting in the near term.'
Bruna Skarica, chief UK economist at US investment bank Morgan Stanley, said: 'Inflation beat consensus as VED and package holidays pushed services inflation above even our higher-than-consensus forecast.
'Goods were weaker than we had expected and, all netted out, headline and core inflation came in line with our forecasts, and just 10bp (basis points) above the BoE's (Bank of England's) estimates. In addition, its measure of underlying services inflation went down, by 20bp. This really was a much better print than it looks at first.'
She said of interest rates: 'We look for the next cut in August.'
Ms Skarica added that Morgan Stanley then sees "sequential cuts to 3.25% by year-end".