U.K. Inflation Slowed in April, but Remains Stubbornly High
Why it matters: The main concern for inflation is food prices.
The slowdown in inflation was smaller than expected by the Bank of England, which forecast 8.4% inflation in April. Inflation data have repeatedly beaten the central bank’s expectations, adding to the challenge facing policymakers tasked with bringing inflation down to its 2% target. Since December 2021, the central bank has raised interest rates from near zero to 4.5%, driving up the price of loans, especially mortgages.
As energy prices fall, Food prices are the biggest driver of inflation. Food prices rose 19% year-on-year in April, just below March’s 19.1%, nearly the fastest pace since 1977.
Food accounted for more than 2 percent of the total proportion. Bread, fish and dairy prices were among those that continued to rise last month.
Britain’s food inflation is among the highest in the developed world, the Bureau of Statistics said on Tuesday. The war in Ukraine and extreme weather have caused food prices to soar and labor shortages to worsen.
On Tuesday, UK Finance Minister Jeremy Hunt met with food producers and the UK’s competition regulator on the cost of food. But it did not announce any plans to cut costs.
Background: Inflation remains higher than in the US and Europe.
Inflation in the UK reached 11.1% in October, the fastest pace of inflation since 1981, largely due to the energy price shock that hit Europe. Like the US, the UK labor market has been slow to recover from the pandemic, forcing companies to raise wages to keep workers, adding further inflationary pressure.
Economists say one reason Britain’s inflation has fallen more slowly than in the United States (4.9%) or the eurozone (7%) is the way energy prices are factored into the calculation. The UK energy regulator caps the price households pay. This limit resets quarterly. When energy prices started to rise over a year ago, this system temporarily shielded homes from the spike. With wholesale energy prices currently falling, it is taking time for the changes to be reflected in household bills.
Overall, UK households and businesses are showing resilience to high prices. The International Monetary Fund said on Tuesday it no longer expected the UK to enter a recession this year, and the Bank of England also recently made this assessment.
However, inflationary pressures could persist further if the outlook strengthens.
“Headline inflation is declining, but policymakers are paying particular attention to indicators of sustained inflation,” Central Bank Governor Andrew Bailey told lawmakers earlier this month.
What’s next: Inflation is expected to continue to fall, but how quickly?
April’s decline is the strongest sign that UK inflation has reached a turning point. Inflation is expected to continue to decline this year if energy prices continue to fall.
However, the rate of decline is unclear. Food price increases are expected to slow further, but economists don’t know when that will take hold. Inflation in the service sector means the Bank of England’s anti-inflation campaign will continue. The government’s target of halving inflation this year, or 5% at the end of the year, risks falling short.