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UK inflation rose more than expected to a 15-month high of 3.5 per cent in April after higher utility bills and tax rises kicked in, prompting traders to price in just one interest rate cut over the next year.
Wednesday’s figure from the Office for National Statistics was both higher than the 3.3 per cent predicted by analysts polled by Reuters and March’s 2.6 per cent.
The rise was driven by higher energy costs after regulators raised the household price cap, as well as jumps in water bills and road tax, the ONS said. Higher airfares also contributed.
Services inflation, a key measure of underlying price pressures for rate-setters, climbed to 5.4 per cent in April, eclipsing the 4.8 per cent expected by analysts and March’s figure of 4.7 per cent.
Suren Thiru, economics director at accountants’ body the ICAEW, said last month’s increase “highlights the brutal hit to household and business finances from April’s multitude of eye-watering bill rises and tax hikes”. James Smith, an economist at ING, said the numbers put “the final nail in the coffin of a Bank of England rate cut in June”.
Traders trimmed their bets back to fully pricing in just one quarter-point rate cut by this time next year, compared with two before the data, according to levels implied by swaps markets. The pound climbed to its highest level against the dollar since early 2022 at $1.347. It later fell back to $1.344.
The Labour government’s increase in employer national insurance contributions is also stoking prices, analysts said. Stuart Morrison, research manager at the British Chambers of Commerce, said companies were facing a “perfect storm of cost pressures” including national insurance, a minimum wage rise and global tariffs.
The UK’s CPI inflation rate was well above readings in Germany and France, as well as the EU level.
The BoE has vowed to persist with a “careful and gradual” approach to additional rate cuts after lowering borrowing costs four times since August.
But the Monetary Policy Committee was split over this month’s decision to cut rates by a quarter-point to their lowest level since 2023. On Tuesday, chief economist Huw Pill said he feared the BoE was reducing rates too rapidly and that the momentum behind falling inflation was “stuttering”.
The numbers came as a setback to chancellor Rachel Reeves, who has been attempting to capitalise on stronger-than-expected first-quarter growth figures as well as a trio of trade deals.
Reacting to the inflation numbers, Reeves said she was “disappointed” and acknowledged that “cost of living pressures are still weighing down on working people”.
She added: “We are a long way from the double digit inflation we saw under the previous administration, but I’m determined that we go further and faster to put more money in people’s pockets.”
The BoE has predicted that inflation will reach 3.7 per cent later this year before falling back to its target of 2 per cent in 2027. But analysts warned that the April data showed signs of higher than expected inflation in some parts of the economy. Core inflation, which excludes energy and food, was ahead of forecasts at 3.8 per cent, while services inflation was well ahead of the BoE’s own forecast, published this month.
Air fares jumped sharply in part because April’s price collection dates coincided with the Easter holidays, analysts said, unlike in 2024.
The question for the BoE will be whether they judge a hefty share of April’s acceleration was driven by erratic or one-off factors, or whether there are signs that underlying inflation remains too hot. One area of concern is rapid wage growth, with annual growth in average weekly wages running at 5.6 per cent, excluding bonuses, in the three months to March.
“Although much of the increase in inflation in April can be put down to higher utility bills, airfares, and a hike in road tax, the big picture remains that underlying inflation is too strong for the BoE to achieve its 2 per cent inflation target,” said Andrew Wishart at Berenberg bank.
Two-year government bond yields, which are sensitive to changes in interest rate expectations, rose 0.04 percentage points to 4.09 per cent in late-morning trading.
“Families are paying the price for the Labour chancellor’s choices,” said Mel Stride, shadow chancellor. “Higher inflation could also mean interest rates stay higher for longer, hitting family finances hard.”
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