UK CPI data is far from ‘what Bank of England policymakers would’ve wanted to see’

This morning’s UK CPI data is far from what Bank of England policymakers would’ve wanted to see, with headline inflation rising by a hotter than expected 2.3% YoY in April, despite a significant drag owing to a sharp fall in consumer energy prices last month due to the drop in the Ofgem energy price cap.

Not only was the headline figure above market expectations, but also above the BoE’s own forecast of 2.1%.

Measures of underlying inflation, and the persistence of price pressures, also provide cause for concern, with core CPI having risen 3.9% YoY last month, while services disinflation was almost non-existent, with services prices rising 5.9% YoY, just 0.1pp below the rate seen in March. Both prints indicate price pressures proving stickier, and more stubborn, than expected, and than policymakers would desire.

Naturally, data of this ilk casts some doubt on the BoE cutting rates as soon as the next MPC meeting in a month’s time, particularly given the implicit condition that the inflation outlook would have to evolve in line with the latest forecasts in order for a cut to be a realistic possibility in June.

That said, one must recall that there is still one further inflation report before the June MPC meeting, albeit the bumpier- and slower-than-expected disinflationary path signalled by today’s data increases the likelihood that policymakers seek to err on the side of caution, and delay any such cut until August.

The GBP has, modestly, rallied in the aftermath of the CPI figures, with risks to the pound seemingly tilted to the upside at this juncture, particularly if the GBP OIS curve reprices hawkishly, pricing out some of the 13.8bp of cuts that had been priced for the June MPC prior to the April inflation figures.