UK CPI Inflation Data (April):

• Core CPI MM: 0.9% (Est: 0.7%; Prev: 0.6%)
• Core CPI YY: 3.9% (Est: 3.6%; Prev: 4.2%)
• Headline CPI MM: 0.3% (Est: 0.2%; Prev: 0.6%)
• Headline CPI YY: 2.3% (Est: 2.1%; Prev: 3.2%)
• CPI Services MM: 1.5% (Est: 1.1%; Prev: 0.6%)
• CPI Services YY: 5.9% (Est: 5.5%; Prev: 6.0%)

Earlier this morning, we received the April inflation numbers from the UK.

According to the Office for National Statistics (ONS), headline inflation slowed to +2.3% in the twelve months to April, down from +3.2% in March. A notable drop in the headline print was expected due to the reduction in the Ofgem energy price cap regulation in the UK.

The latest inflation data marks the lowest inflation rate since 2021 and we’re evidently fast approaching the Bank of England’s (BoE) inflation target of 2.0%. Between March and April, headline CPI inflation also cooled to +0.3%, down from +0.6%.

The ONS communicated that ‘Falling gas and electricity prices resulted in the largest downward contributions to the monthly change in both CPIH and CPI annual rates, while the largest, partially offsetting, upward contribution came from motor fuels, with prices rising this year but falling a year ago’.

Sticky Services Inflation

Given the slower-than-expected pace of disinflation in the headline numbers (as well as core inflation also coming in higher than expected and remaining stubbornly high year on year at +3.9% versus the +3.6% estimate [prior: +4.2%]) and services inflation, a metric that the BoE is keeping a close eye on, coming in stronger than expected at +5.9% versus +5.5% expected (prior +6.0%), this may throw a ‘spanner in the works’ for a rate cut in June. Indeed, we saw traders pare bets on rate cuts this morning, with the OIS curve implying just a 14% probability of a rate cut at June’s meeting (this was around 50% yesterday) and a 32% chance of a rate cut unfolding in August, with September’s meeting still on the table as a possibility (-20bps priced in) and November’s meeting fully priced in for a -25bp rate cut. For the entire year, we now see less than two rate cuts priced in (-40bps).

The latest data places the BoE in a tricky situation considering elevated wage growth likely to continue underpinning domestic price pressures. Earlier this month, the ONS reported that in the three months to March (3M/YY), regular pay (excluding bonuses) rose +6.0%, matching February’s reading though slightly higher than the market consensus of +5.9%. Pay (including bonuses) rose +5.7%, up from February’s +5.6% and the +5.5% forecast. This means that real pay has risen 2.4% when considering current inflation levels, which marks the highest reading since late 2021.

We have one more wage report on 11 June and another inflation release on 19 June to contend with before the BoE takes the stage on 20 June.

UK Prime Minister Rishi Sunak Welcomed Cooling Inflation

This was a release cheered by UK Prime Minister Rishi Sunak, commenting: ‘Today marks a major moment for the economy, with inflation back to normal. This is proof that the plan is working and that the difficult decisions we have taken are paying off. Brighter days are ahead, but only if we stick to the plan to improve economic security and opportunity for everyone’.

Market Reaction

In the immediate aftermath of the release, sterling (GBP) rose against all its G10 peers. Aside from New Zealand (NZD), which was slammed lower in Asia Pac following the update from the Reserve Bank of New Zealand (RBNZ), GBP continues to display outperformance as of writing.

The FTSE 100 is currently -0.4% lower in early trading this morning, continuing to edge lower after pencilling in an all-time high of 8,476 last week, and UK Gilts are also trading lower (yields higher).

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