CPI inflation spikes to highest rate since 2013

UK inflation is spiking higher than expected, with official data on Tuesday showing consumer prices rising well above the Bank of England's 2% target and at their fastest in three and a half years.

The consumer price index rose 0.5% in April compared to March, when it had risen 0.4%, a rate that was expected again last month.

Compared to last year, the Office for National Statistics said consumer prices inflated 2.7%, leaping up from 2.3% the month before and ahead of the 2.6% consensus forecast - but in line with the BoE forecast from last week.

Core CPI, which strips out more volatile prices like food and energy, was up 0.5% month-on-month and 2.4% year-on-year, up from 1.8% the months before and above forecast as retailers hiked prices to account for sterling’s depreciation.

CPIH, the ONS's new headline measure of inflation that includes a measure of owner occupiers' housing costs and council tax, was 2.6% in April versus 2.3% in March.

CPI was lifted by a later Easter in 2017 compared to 2016, meaning air fares jumped 18.6% year-on-year in April, while several energy companies hiked prices in March and April and clothes prices were also cited by the ONS, while the headline number could have been even higher were it not for a fall in petrol prices.

Reaction and analysis

Consumer price inflation is making serious inroads into consumers’ purchasing power, said economist Howard Archer at IHS Markit, with prices rises in April "highly likely" to have moved clearly above annual average earnings growth, which was 2.3% in the three months to February and will be updated by the ONS on Wednesday.

Despite this, Archer predicted the Bank of England will sit tight on interest rates through 2017 and 2018 "and very possibly well beyond", remaining tolerant on the inflation overshoot "given likely limited UK growth and the prolonged, highly uncertain outlook that the UK economy will face as the government negotiates the exit from the EU".

As the sharp rise in inflation mainly reflected a number of factors that won’t be repeated, Scott Bowman at Capital Economic thought this will have taken inflation close to its eventual peak.

The fall back in producer input price inflation over each of the past three months suggests that the exchange rate pass-through into inflation will be less protracted than usual, said Bowman, who foresees a BoE hike midway through next year.

"And with few signs of domestic cost pressures building, we think that CPI inflation will peak at a little over 3% before the end of the year. What’s more, with inflation expectations continuing to remain anchored and sterling reversing some of its previous appreciation more recently, we believe that inflation will drift back towards the target thereafter.

"This means that, although nominal wage growth has been subdued recently, the squeeze on real wages shouldn’t be too large or long-lasting."

He was not the only one, with Sam Tombs at Pantheon Macroeconomics noting that as April’s inflation rate matched the prediction from the BoE's Monetary Policy Committee in last week’s inflation report, "we doubt it will prompt any members to join Kristin Forbes in voting to raise interest rates at the next meeting in June".

Tombs sees CPI inflation peaking in Q4 at 3.2%, above the MPC’s 2.8% but doubt that a majority of MPC voters will emerge to raise rates this year.

"Crucially, measures of domestically-generated inflation have remained relatively subdued and wage growth has eased, rather than followed inflation higher, so far this year."

Pound loses momentum, stocks don't

There was an initial spike in the pound on the publishing of the ONS data but this was quickly erased.

"The headline number will grab plenty of attention, but what is particularly interesting is the robust core figure," said analyst Chris Beauchamp at IG. "It looks like the Bank of England has a tough job ahead of it, balancing the need for higher rates with an awareness of bumpy road ahead for the UK economy."

Craig Erlam at Oanda said the BoE has made it clear that it aims to look through the inflation spike so .little will have changed from a monetary policy perspective.

"With the pound already struggling around 1.30 against the dollar, the sell-off that followed to levels well below where it was prior to the release is an indication of an exhausted rally that’s possibly crying out for a correction. Given the size of the moves we’ve seen over the last month, this could easily be what we’re seeing, having failed repeatedly at the recent highs," Erlam said.

As for stocks, inflation is further dimming the appeal of bonds and so will raise demand for equities, said fund manager Paul Mumford at Cavendish Asset Management.

"With yields below the rate of inflation, capital is effectively being eroded. These are ideal conditions for a potential return of the cult of equity, which although riskier, looks favourable in current market conditions," he said.

"The rate of inflation could be forced even higher by the price of oil, as this may nudge upwards due to OPEC action this month – resulting in an even more compelling argument for equities."