"Does the Central Bank cut in June, or take advantage of the fact inflation came in a touch higher than expected and hold off until its August meeting?"
- Nicholas Hyett, investment manager at Wealth Club
CPI inflation came in at 2.3% in April, down from 3.2% in March but higher than economists' forecast of 2.1%.
Core CPI (excluding energy, food, alcohol and tobacco) rose by 3.9% in the 12 months to April, down from 4.2% in March.
On a monthly basis, CPI rose by 0.3% in April, compared with a rise of 1.2% in April 2023.
CPIH inflation, which includes owner occupiers’ housing costs, rose by 3.0% in the 12 months to April, down from 3.8% in March. Core CPIH (excluding energy, food, alcohol and tobacco) rose by 4.4% over the year, down from 4.7% in March.
The largest factor behind falling inflation came from lower energy costs on the back of Ofgem’s 12% reduction in the household bills cap. The 27.1% fall in gas, electricity and other fuel prices was the largest on record.
However, some industry experts said that economic growth and higher than predicted core inflation could mean that the Bank of England holds off on a base rate cut until later this year.
Nicholas Hyett, investment manager at Wealth Club, said: "Inflation hasn't fallen quite as much as economists had expected, but it is back within the Bank's target range for the first time in nearly three years. That's a relief for families and businesses who've struggled with rapidly rising prices, but also for Bank Governor, Andrew Bailey - who, for the first time in a long time, won't be penning a letter to the Chancellor setting out what the Bank is doing to get inflation back under control.
"However, the Bank's job is still far from over. With inflation back at target, the danger now is that high interest rates start to suffocate the economy. All eyes will be on the MPC next month to see whether they will cut interest rates. That decision isn't made easier by core inflation, which excludes the effect of global food and energy prices and remains far higher at 3.9%.
"Does the Central Bank cut in June, or take advantage of the fact inflation came in a touch higher than expected and hold off until its August meeting? Movements in currency markets this morning suggest an August cut just became a little more likely."
Derrick Dunne, CEO of YOU Asset Management, said: “There’s not much in the way of surprises in today’s inflation figures, but a few areas will leave the Bank of England pondering its next move. With inflation back effectively to target, the Monetary Policy Committee (MPC) will be considering when, not if, rate cuts should follow. However, those wishing for swinging rate cuts to ease pressure on households might not immediately get what they want.
“With the economy growing again and the fabled ‘soft landing’ apparently achieved, the incentive to cut rates is less strong. Chances are we’ll see that cut in the Summer, although persistent services inflation, alongside robust wage growth, will dampen the enthusiasm for it. It is possible we’ll see the MPC hold fire until there’s strong evidence that wage growth is cooling, which could be late in the Summer.
Rob Morgan, chief investment analyst at Charles Stanley, added: "While the downward trajectory of inflation in the US has stalled, in Europe and the UK the central bank fight against rising prices is bearing more fruit. The further substantial leg down in April’s UK CPI confirms this.
"However, this was less than many expected, and inflation numbers are developing a nasty habit of coming in hot. What’s more core inflation which strips out volatile food and energy prices is still stubborn at 3.9%, and services inflation is still cooling only slowly at 5.9%. April price rises in bills including water and broadband offset the cut to the energy price cap, while petrol and diesel prices also contributed over the year.
"There are some economic trends that point to a difficult last mile to sustainably keep inflation to its 2% target.
"For starters, economic growth – at 0.6% in the first quarter despite a slowdown in construction – has surprised on the upside. This is good news, but it does make the Bank of England’s decision making harder. Cutting rates would add fuel to the inflationary embers, which is intuitively the right course of action if the economy is in recession but a far more difficult call if it is expanding at a decent clip.
"Of greater concern to the BoE is wage growth, which has remained remarkably firm despite other employment trends such as unemployment weaking. As a key input into services inflation, this is a critical component of the BoE’s thinking and a nut it is yet to crack.
"With increases to minimum wage, cuts to national insurance rates, potential further tax cuts ahead of the general election, household spending power, at least for a decent proportion of the population, is now increasing. Today’s wage rises contribute to tomorrow’s spending power, adding to demand, so the strength seen is an impediment to the BoE returning inflation to the 2% target sustainably.
"Taking all this into consideration, worries about a second wave of inflation are well founded. While the Bank should feel able to take its foot off the brake given the progress so far, should these signs of persistence continue the pace of rate cuts to follow may be slow and limited. It also means insufficient members of the MPC will see a clear enough trigger to act quickly on rate cuts at the June meeting. Increasingly, it looks like the balance of voting members will wish to sit on their hands until the second half of the year."
