Key Takeaways
U.K. inflation cooled more than expected in April, but a surge in factory-gate prices to a three-year high signals that the relief for consumers may be short-lived as the conflict in Iran drives up energy costs.
"The drop in CPI inflation... feels like the lull before the storm and tells us very little about the persistence of the surge in inflation to come," analysts at Capital Economics said in a note Wednesday.
Consumer prices rose 2.8% annually, a larger slowdown than the 3.0% consensus forecast and down from 3.3% in March, the Office for National Statistics said. The reading was driven by government measures to lower household energy bills. Core inflation, which excludes volatile food and energy, also fell to 2.5%.
The data complicates the outlook for the Bank of England, which now faces slowing consumer inflation but rising cost pressures in the production pipeline. The softer headline CPI reduces the immediate need for an interest rate hike at the bank's June meeting, but the specter of stagflation looms if energy prices remain elevated.
###Producers Feel the Heat
While consumers saw some relief, British producers faced a sharp acceleration in costs. The producer price index (PPI) for output jumped to 4.0% year-on-year, blowing past estimates of 2.8%.
The increase was fueled by a 7.7% surge in input costs, with crude oil and refined petroleum products being the largest contributors. This reflects the impact of the war in the Middle East on global energy markets and suggests that higher costs will eventually be passed on to consumers, threatening the recent slowdown in CPI.
"Inflation would have almost certainly fallen back to the BOE’s 2% target in April had the Iran conflict not dramatically flipped the U.K.’s outlook from disinflation to stagflation,” said Suren Thiru, chief economist at The Institute of Chartered Accountants in England and Wales.
###Bank of England's Dilemma
The mixed data presents a challenge for the central bank. Labor market data released Tuesday showed wage growth slowing, and the April CPI print gives policymakers breathing room. UK government bond yields declined following the release as investors pared back bets on an imminent rate hike.
"Inflation coming in softer than expected will further take the pressure off the BOE to hike rates over the next few meetings," said Luke Bartholomew, deputy chief economist at Aberdeen. "But we are most certainly not out of the woods in terms of the impact of the Iran conflict on inflation."
The Bank of England has forecast that in a more severe scenario where energy prices remain high, inflation could peak above 6% in early 2027. Recent data showing the U.K. economy grew a stronger-than-expected 0.6% in the first quarter could give the BoE more headroom to raise rates if inflation proves persistent.
This article is for informational purposes only and does not constitute investment advice.
