'Halving Inflation' Just Got a Lot Harder

UK inflation stays above 10%, making an interest rate hike in May more likely, and Jeremy Hunt's claims of 2.9% inflation by the end of 2023 more of a stretch

Alliance News 19 April, 2023 | 9:53AM
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Bank of England

UK consumer price inflation remained above 10% in March, defying expectations of a fall to 9.8%, maintaining pressure on the Bank of England to keep raising interest rates.

According to the Office for National Statistics, the annual rise in consumer prices cooled slightly to 10.1% in March from 10.4% in February. This was less of a slowdown than expected, with FXStreet-cited market consensus calling for UK inflation to fall below 10% to 9.8%.

"The easing in the annual inflation rate in March 2023 mainly reflected price changes in the transport division, particularly for motor fuels," ONS explained. "There were also downward effects from housing and household services, furniture and household goods, clothing and footwear, and restaurants and hotels."

However, these downward movements were partially offset by price increases in food and non-alcoholic beverages, as well as recreation and culture, ONS said.

On a monthly basis, prices edged up 0.8% in March, compared to a 1.1% rise in February. The figure also topped consensus expectations of a 0.5% rise.

Instant Reactions to Inflation Figures

Hugh Gimber, global market strategist at J.P. Morgan Asset Management:“Stabilising energy prices will help to bring inflation lower over the second half of the year, but it is increasingly evident that an extended period of below-trend growth will be required to rein in core price pressures. Another 25 basis point rate hike appears highly likely in May, and the Bank must stand ready to take further action unless economic data shows more definitive signs of cooling. Policymakers have come a long way in their fight against inflation. Going forward, the biggest mistake would be to claim victory prematurely.”

Derrick Dunne, CEO of YOU Asset Management, commented: “Today’s data makes Jeremy Hunt’s claim that we’ll hit 2.9% by the end of the year look very ambitious. The hope now is the next inflation reading will start to show materially lower levels of inflation as energy price falls really begin to feed through. But this is little comfort for households facing a major price shock to other aspects of their budgets such as food.

“The big question here is what the Bank of England does next. Initially there had been an expectation that we’d see a final 0.25% rise come May. But inflation, particularly the core component, persisting higher for longer leaves the Bank of England will little option but to keep hiking, no matter the economic outlook.

"For us to see rates coming down we’ll need to see inflation drop significantly in the next few months. This will support the economy but the incredibly delicate balance policy makers now find themselves in is painfully clear.

Daniele Antonucci, chief economist and macro strategist, Quintet Private Bank (parent of Brown Shipley): “The latest UK inflation figures suggest to us that the Bank of England will likely have no choice other than to continue to raise interest rates for a while longer.

Even though economic activity is weak and the income squeeze from high interest rates is a contributing factor, we think that the elevated inflation level, which remained at over 10% in March, increases the odds of yet another rate rise from the Bank of England in May.”

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