CPI inflation falls back in April

UK CPI inflation slowed considerably in April (8.7% from 10.1% in March), as last year’s large rise in the Ofgem energy price cap dropped out of the annual comparison. April’s outturn will be seen as a disappointment, however, as it overshot consensus forecast expectations of a sharper fall (8.2%). In particular, measures of domestically-driven inflation surprised to the upside, suggesting that underlying price pressures remain firm.

Inflation should continue to ease over the coming months, as base effects from last year unwind further and the recent fall in energy prices feeds through to lower household bills from July (when the Ofgem price cap will fall to £2,074, below the Energy Price Guarantee’s cap of £2,500). Nevertheless, we still expect inflation to remain noticeably above the Bank of England’s 2% target at the end of this year, and risks are titled to the upside given the strength of underlying inflationary pressures.

The Bank of England is, nonetheless, likely close to the peak in its rate tightening cycle, but the Monetary Policy Committee (MPC) will be wary of the risk that stickier domestic price pressures will make it harder to bring inflation back down to target. Therefore, it’s reasonable to expect at least one more rate rise in the coming months.