HomeBussinessBig drop in UK inflation rate disguises more disappointing details

Big drop in UK inflation rate disguises more disappointing details

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The annual inflation rate fell sharply in April. Prices are rising more slowly than at any time in almost three years. Inflation is lower in the UK than it is in the EU.

Even so, the latest bulletin on the cost of living from the Office for National Statistics was mildly disappointing. April’s inflation figure was always going to be good, with a sharp fall guaranteed by the fact the energy price increases of a year earlier were not repeated.

But at 2.3%, the number was slightly higher than expected. The consensus among economists polled by Reuters was 2.1%. Some had even predicted it would drop below the government’s 2% target.

The main reason for the fall from 3.2% in March was the continuing downward trend in household energy bills. According to the ONS, prices of electricity, gas and other fuels were 27.1% lower this April than in April 2023, the sharpest decline since records began in 1989. Food price inflation was also down – from 4% to 2.8%.

These developments are helpful for poorer households, which spend a bigger share of their income on heating, lighting and putting food on the table.

But there was also some less good news. Core inflation – which strips out food, energy, tobacco and alcoholic drinks – fell from 4.2% to 3.9%, rather than the 3.6% expected. Even more worryingly, inflation in the services sector – which is closely monitored by Bank of England interest rate setters – barely budged, falling from 6% to 5.9%.

One reason for that appears to be that businesses passed on at least some of the higher costs from the higher national living wage, which went up from £10.42 to £11.44 last month, to their customers. Inflation in the hotels and restaurants sector – parts of the economy with a heavy concentration of minimum-wage workers – rose last month from 5.8% to 6%.

The Bank’s monetary policy committee will be paying a lot more attention to services inflation than they will to the headline 2.3% figure because it thinks it is a reasonable guide to price pressures generated by the domestic UK economy.

Rob Wood, the chief UK economist at Pantheon Macroeconomics, said there were plenty of examples of sticky service inflation: accommodation, water bills, air fares, catering, and recreation and cultural services all experienced hefty price increases last month. “Upside surprises elsewhere were widespread, not focused in a few erratic components,” he said.

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Paul Dales, the chief UK economist at Capital Economics, had been predicting a much bigger fall to 5.2% in services inflation in April, and says the much smaller decrease will affect the timing of cuts in official borrowing costs.

“Even though there is still a wages and an inflation release to go before the Bank of England meeting on 20 June, it feels as though a cut then now seems very unlikely. Even a cut in August is looking a bit more doubtful,” he said.

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