UK inflation falls less than expected, dashing June rate cut hopes

Inflation in Britain fell by less than expected in April and a key core measure barely dropped, prompting investors to pull bets on a rate cut next month which could have boosted embattled Prime Minister Rishi Sunak before an election this year.

Consumer prices rose by an annual 2.3% last month, down sharply from a 3.2% increase in March and its lowest since July 2021 when it stood at 2.0%, the Office for National Statistics said.

But the Bank of England – which has an inflation target of 2% – and economists polled by Reuters had forecast a bigger drop to 2.1%.

Services inflation – a key gauge of domestically generated price pressure for the BoE – was much higher than expected, while petrol prices also rose.

Sterling jumped after the data and investors priced the chance of a BoE rate cut in June at just 18%, down from 50% on Tuesday.

Economists had expected a sharper drop in inflation after a 12% drop in regulated household energy tariffs that took effect last month.

“While inflation continues to fall sharply, this report will come as a disappointment to the Bank of England and investors looking for a rate cut in June,” said Luke Bartholomew, senior economist at asset manager abrdn.

“In particular, the strength of core inflation and services inflation, both of which came in a fair bit stronger than expected, will make it harder for the Bank to feel confident that underlying inflation pressure is cooling adequately.”

Services inflation inched down to 5.9% from 6.0% in March. The BoE’s forecasts and the Reuters poll had pointed to a reading of 5.5%.

Core inflation, which includes goods but not energy, food and tobacco, also reflected persistent price pressures, with the annual rate falling only to 3.9% from 4.2% in March. The Reuters poll had forecast a reading of 3.6%.