UK inflation slowed in April but remains stubbornly high
Why it matters: Food prices are the biggest concern for inflation.
The slowdown in inflation was less than the Bank of England’s forecast, which had forecast 8.4 percent for April. Inflation data has repeatedly come in higher than the bank expects, compounding the challenge for policymakers to bring inflation down to the 2 percent target. Since December 2021, the central bank has raised interest rates from almost zero to 4.5 percent, making loans, especially mortgages, more expensive.
As energy prices fall, food prices have become the biggest contributor to inflation. In April, food prices rose 19 percent from a year earlier, slightly down from 19.1 percent in March, which was about the fastest rate since 1977.
Food accounted for more than 2 percentage points of the total percentage. The prices of bread, fish and dairy, among other things, continued to rise in the past month.
Britain’s food inflation is among the highest in developed economies, the statistics office said on Tuesday. The war in Ukraine and extreme weather conditions have driven up food prices, exacerbated by labor shortages.
On Tuesday, Jeremy Hunt, the UK Chancellor of the Exchequer, met with food manufacturers and the UK competition regulator about the cost of food, but announced no plans to reduce costs.
Background: Inflation still higher than in the US and Europe.
UK inflation peaked at 11.1 percent in October, the fastest rate of price increases since 1981, largely driven by the energy price shock that hit Europe. As in the United States, the UK labor market has been slow to recover from the pandemic, forcing companies to push up wages to retain workers, adding further inflationary pressures.
One of the reasons inflation in Britain has fallen more slowly than the United States (where it is 4.9 percent) and the eurozone (7 percent), economists say, is because of how energy prices are factored into the calculation. . The British energy regulator sets a ceiling on the prices that households pay. That cap is reset every quarter. When energy prices started to rise more than a year ago, this system temporarily insulated households from that rise. Now that wholesale energy prices have fallen, household bills are taking longer to reflect that change.
Overall, UK households and businesses have shown resilience in the face of high prices. On Tuesday, the International Monetary Fund said it no longer expected Britain to experience a recession this year, an assessment the Bank of England had recently made.
But the stronger outlook could make inflationary pressures more persistent.
“Even as headline inflation is falling,” central bank governor Andrew Bailey told lawmakers earlier this month, policymakers are “paying particular attention to indicators of inflation persistence.”
What’s Next: Inflation is expected to continue falling, but how soon?
The fall in April is the strongest signal that inflation in Britain is around the corner. If energy prices continue to fall, inflation is expected to fall further this year.
But the speed of that decline is uncertain. Food prices are expected to rise more slowly, but economists aren’t sure when that will continue. Inflation in the services sector means that the Bank of England’s campaign to curb inflation will continue. The government’s target of halving inflation this year, which equates to an inflation rate of 5 percent by the end of the year, threatens to fall out of reach.