UK CPI was 2.8% in April, down from 3.3% in March and below the consensus and BoE expectation (3.0%). There were a lot of moving parts to the April number, and a forecast miss is no great surprise. The two main reasons for the decrease in the headline rate were: 1) favourable base effects after the jump in regulated/indexed services prices last year, and 2) lower household energy costs, largely driven by pre-Iran government policy decisions. The volatile airfares and package holiday components also weighed on headline inflation, and food inflation was softer than we expected. All of this more than offset the impact of higher fuel prices (23% Y/Y), which remains the only obvious impact of the Iran conflict on the CPI so far.
That will change. Regardless of any positive geopolitical developments, there is plenty of inflation in the pipeline with consequences of Hormuz disruption set to cascade through the economy. Producer input prices increased by 7.7% Y/Y in April. Factory gate prices rose by 4.0%. The decrease in household energy costs will also prove fleeting in the absence of any government support measures. The price cap is likely to be increased by 10-15% from July. The downward effect on the April inflation number from airfares/travel may well reverse next month as well. Looking ahead, we expect headline UK inflation to reach 4% by year-end, with more gradual pass-through to components such as food.
But the combination of these CPI numbers and yesterday’s labour market data (see here) reduce the pressure on the BoE to act immediately. Setting aside noise from base effects, energy policy and travel, today’s data shows that domestically generated inflation fell in April. There was some progress on underlying services inflation, which has eased below 4% to the lowest mark since early 2022. The benign food inflation number (3.0%, from 3.6%) will help ease some concerns around risks of higher household inflation expectations.