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Core, Blimey!

As markets weigh on the Bank of England’s interest rate decision on 22 June, this morning’s hotter-than-expected inflation print has seen investors upwardly revise rate hike expectations. Indeed, market reaction to this morning’s print is a further reaffirmation that inflation continues to be the hottest topic of conversation.

According to the ONS, core inflation rose to its highest level since March 1992, as the index increased from 6.2% in March to 6.8% in April. Here, the rising costs associated with recreation and culture; transport; and miscellaneous goods and services were primary drivers of the increase, as the cost of living continues to squeeze household budgets. The print surpassed market forecasts of 6.2%, with services inflation now looking increasingly sticky.

Meanwhile, though headline CPI fell to its lowest level since March 2022, it nonetheless surpassed expectations of 8.2% with the index hitting 8.7%. While this marks a considerable slowdown from March’s figure of 10.1% (and the recent 11.1% peak seen in October 2022), it remains well above the BoE’s 2% target. According to the ONS, easing electricity and gas prices contributed 1.42 percentage points to the drop in the annualised rate inflation for April. Nevertheless, inflationary pressures on food remained a key reason why the headline figure continues to remain elevated. For example, the food price index remained above 19%, having fallen just 0.1 percentage point below last month’s 45-year high. The ONS cited the rising cost of rice, flour, pasta, eggs and fruit as key drivers behind the index’ rise. This comes as 44% of adults are saying that they are reducing their outgoings on shopping, buying less on food and shopping essentials as the rising cost of living continues to hit households across the country.

Today’s hotter-than-expected inflationary prints have again reiterated the scale of the challenge that the Bank of England faces in trying to get inflation back in line with its 2% target. As alluded to, money markets are implying that a 25bp rate hike is now fully priced in for June, as well as a further 25bp hike by August. Given that markets had expected an 88% chance of a 25bp hike on Tuesday, this morning’s print has given greater credence to the view that the BoE will need to commit to further monetary tightening in order to cool inflation. With the BoE’s base interest rate currently at 4.5% – their highest level since 2008 – this would imply that the Threadneedle Street will raise rates to 5%.

With UK’s headline inflation at 8.6%, it remains well above many of its peers. For example, over April inflation in the US cooled to 4.9%, while France and Germany saw a print of 5.9% and 7.2%, respectively. Just last week, Bailey emphasised that the tight labour market was still a key driver of inflationary pressure in the UK, and that the economy was subject to a wage-price spiral. Here, Bailey maintained persistent inflation “reflects second-round effects as the external shocks we have seen interact with the state of the domestic economy. And as headline inflation falls, these second-round effects are unlikely to go away as quickly as they appeared.” Accordingly, he supported the view that further monetary tightening was needed to bring inflation back down to its 2% target, though more dovish members of the MPC remain concerned over the implications of over-tightening, with Tenreyro and Dhingra voting to keep rates unchanged for quite some time. Bailey also maintained that the effects of the BoE’s rate hikes were still working their way through the economy, highlighting the time lag between monetary tightening and easing inflation.

In their latest forecast, the Bank of England predicted that inflation would ease to 5.1% by Q4 2023 – a considerable upward revision from their forecast in February which indicated that inflation would fall to 3.9%. Policy makers currently predict that inflation will remain elevated above their 2% target until late next year, and today’s print will do little to assuage concerns over protracted, sticky inflation.

As such with inflation remaining the hottest topic of conversation, all eyes are now on the BoE’s next rate decision on 22 June.

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