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Core Inflation Surges to Highest Level Since 1992

Core inflation has risen to its highest level since March 1992, following a surge which saw the index rise 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 rise in the index, as the cost of living continues to squeeze household budgets. The print widely surpassed expectations of the index remaining steady at 6.2%. The higher-than-expected print this morning reiterates the scale of the challenge that the Bank of England faces in trying to get inflation back in line with its 2% target, as markets now weigh on the MPC opting for a 25bp rate hike on 22nd June. With money markets implying that a 25bps rate hike is fully priced in for June, there is now the prospect of a further 25bps hike by August. Given that markets had expected an

88% chance of a 25bp hike on Tuesday, this morning’s print has reaffirmed the market’s view

that the BoE will need to further tighten to keep inflation under control.  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%.

 

In their latest forecast, the Bank of England predicted that inflation would ease to 5.1% by Q4 2023 – a considerable rise to 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.

 

Headline Eases But is Hotter-than-Expected

Headline CPI has fallen to its lowest level since March 2022 as gas and electricity cost pressures eased. Prices rose 8.7% on an annualised basis for the month of April 2023, and while this marks a considerable slowdown from March’s figure of 10.1% and the recent 11.1% peak, it nonetheless surpassed expectations of 8.2%.

Similarly, RPI came in 11.4% well surpassing expectations of 11.1% in yet another blow to the Treasury, given that around 25% of the nation’s debt is linked to RPI as is other items such as rail fairs.

Food Price Index Remains above 19%

The food price index also remained elevated – at its second highest level in 45 years – hitting 19.1% with the largest contributor being the increasing cost of bread and cereals and a rise of the duty on tobacco which had not increased since October 2021. 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.

 

Market Reaction

As markets weigh on further monetary tightening from Threadneedle Street, the domestically focused FTSE 250 has come under pressure with the index slipping around 1% this morning. The blue-chip FTSE 100 has also fallen 1% as the prospect of higher rates for longer weighs on the index and debt-ceiling concerns impact investor sentiment.

The yield on the UK 10-year bond has also risen above 4.16%, some 44bps above the US 10-year benchmark and 169bps above the German 10-year Bund.

Oil Prices Rise on Prospect of OPEC+ Cuts

This morning’s open has seen oil prices trade higher, with WTI crude futures trading around $73.5 dpb. A rise of some 0.8% in the last 24 hours. Much of the price action follows the Saudi energy minister raising fears that OPEC+ would make further cuts ahead of their next meeting on 4 June. This follows OPEC+’s announcement earlier this year that they would look to reduce output by some 1.16 million barrels per day from May until the end of 2023.

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