UK inflation falls sharply in April; GBP rallies across most majors
UK inflation has dropped to 8.7%, the lowest since March 2022. As expected, it’s energy prices that caused the big drop in annual inflation in the year to April. This time last year, global energy prices had surged after the Russian invasion of Ukraine. Those price rises are now baked in to the figures, so the headline inflation figure is falling.
While the overall drop in inflation will be welcomed, there is limited comfort when looking at food prices: prices for food and non-alcoholic drinks rose by 19% in the year to April. That was only a marginal drop from the 19.1% rate in March. The Office for National Statistics’ indicative modelled estimates suggest that the annual rate for food and drink in April 2023 is the second highest seen for over 45 years, when the rate in August 1977 was estimated to be 21.9%.
The headline inflation rate may be falling, but there are also other signs that the UK is not done with price pressures just yet: core inflation is at its highest since 1992.
Core inflation is a measure closely watched by economists because it strips out the most volatile components of the index – like food, energy, alcohol and tobacco – in an effort to work out the underlying picture. For the Bank of England, that adds to pressure to keep on raising interest rates to cool inflation.
The GBP rallied against the EUR, USD and other major currencies in an initial response to the news that UK CPI grew 8.7% in the year to April, down from 10.1% in March, but above the 8.3% reading the market was looking for.
The Bank of England will almost certainly be unable to abandon its interest rate hiking cycle when it considers the all-important core CPI inflation reading which strips out energy and food and gives a better understanding of UK-specific inflationary conditions.
The GBP/EUR rate rose to a high of 1.1562 in the wake of the release, which is its highest level since December.
The GBP/USD rate on the other hand rose to highs of 1.2470. Despite falling below 1.24 yesterday, cable found support this morning after the strong UK inflation data, raising market expectations of another BoE hike next month.
Lastly, EUR/USD has gained traction and advanced toward 1.0800 in the early European session on Wednesday. Although the German IFO survey showed a deterioration in business sentiment, the improvement in Expectations Index helped the EUR find demand.
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