UK inflation comes in hotter than expected, slashing June rate cut bets

U.K. inflation fell to 2.3% in April, the Office for National Statistics said on Wednesday, coming closer to the Bank of England’s target rate even while missing expectations. Core inflation, excluding energy, food, alcohol and tobacco, dipped to 3.9% in April from 4.2% in March. The war between Russia and Ukraine — both major producers of food commodities and energy — has disrupted global production, trade and supply in these areas, leading to a surge in prices. Solstock | E+ | Getty Images

U.K. inflation came in hotter than expected with a drop to 2.3% in April, the Office for National Statistics said Wednesday, prompting traders to pull back from bets on a June interest rate cut from the British central bank.

The headline reading declined from 3.2% in March. The April print marked the first time inflation has been below 3% since July 2021 and brings it within touching distance of the Bank of England’s 2% target.

Economists polled by Reuters had nevertheless expected a steeper drop to 2.1%.

Services inflation — a key measure being watched by the BOE because of the dominance of the sector in the U.K. economy and its reflection of domestically-generated price rises — eased only slightly to 5.9% from 6%. That missed a forecast of 5.5% from both a Reuters poll and the BOE.

Core inflation, excluding energy, food, alcohol and tobacco, dipped to 3.9% in April from 4.2% in March.

A dramatic drop in the headline rate was widely expected because of the year-on-year decline in energy prices. Investors were instead set to focus on core and services inflation, after BOE policymakers indicated they would be willing to cut interest rates some time in the summer, but stressed that the timing would depend on fresh data.

Following the print, money markets slashed the probability of a June rate cut to just 15%, down from 50% earlier in the day. The likelihood of an August cut was seen at 40%, down from 70%.

June cut ‘unlikely’

Both core and services were “disappointing,” said Suren Thiru, economics director of the Institute of Chartered Accountants in England and Wales.

“Lingering concerns over underlying inflationary pressures mean a June rate cut is unlikely. However, these figures may convince more rate setters to vote to ease policy, providing a signal that

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Three key insights from our long-term Consensus Forecasts

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The world economy has been in constant flux in recent decades, and the next ten years promise to be no different. In our latest special report, we look at three key takeaways from our long-term Consensus Forecasts for the next decade. Below is a summary of what to expect: 

U.S. and Europe will continue to diverge

Our long-term Consensus Forecasts expect U.S. real GDP growth to outpace Euro area real GDP growth by an average of 0.6 percentage points per year over the next decade. As a result, the U.S. economy should be over 16 trillion dollars larger than the Euro area economy by 2034, compared to 12 trillion dollars today. Stronger demographics, a laxer regulatory environment, a more flexible labor market, a more unified capital market and leadership in emerging technologies will all be important factors helping the U.S. economy forge ahead of the European economy in the coming years.

China’s economic growth will slow sharply 

China’s annual GDP growth is to slip below 3% within a decade’s time, according to our long-term Consensus Forecasts—above the rates of developed markets but a far cry from the growth seen in China in recent decades. A host of factors will be behind this slowdown. The scope for relatively easy catch-up growth is diminishing as the physical capital stock and urbanization rate rise. The population will decline at an ever-sharper pace in the coming years, weighing on private consumption and the property sector. And intensifying trade and tech restrictions from the West will hamper the export sector and investment.  

India to become the world’s third-largest economy

Our long-term Consensus Forecasts project that India will become the world’s third-largest economy in nominal GDP terms before the end of this decade, with economic growth expected to average over 5% per year. This impressive economic performance will be underpinned by multiple drivers, chiefly a population expected to grow in excess of 10 million people per year, business-friendly reforms, political stability under long-serving Prime Minister Narendra Modi, and the country’s attractiveness as a base for firms looking to divest from China. That said, China was growing at over 8% per year when it had a similar GDP per capita to India; as such, India is still not maximizing its full economic potential.

Britain’s inflation rate could be about to drop below the Bank of England’s 2% target

Economists see the latest U.K. inflation print, out Wednesday, taking the headline rate near or even below the Bank of England’s 2% target. That is largely due to energy prices, which fell sharply in April. Markets remain divided on the chance of a June interest rate cut, and the level of services inflation may be key. A shopper selects fresh produce from a market stall in the Kingston district of London, UK, on Monday, May 20, 2024.  Bloomberg | Bloomberg | Getty Images

LONDON — U.K. inflation could be about to hit a major milestone, with some forecasting that a sharp fall in the April print will take the headline rate below the Bank of England’s 2% target.

That would represent a plunge from the current level of 3.2% and could “make or break” a June interest rate cut, economists say.

The decline will largely be driven by the energy market, after the regulator-set cap on household electricity and gas bills came down by 12% at the start of April.

A reading below 2% on Wednesday would be the lowest headline inflation rate since April 2021, and a cooling from the peak of 11.1% hit in October 2022 — when U.K. price rises were among the most severe of all developed economies.

The country has been hit by a range of inflationary pressures, including a persistently tight labor market, weakness in the currency increasing the cost of imports, and steeper rises in gas bills than were seen elsewhere.

‘Momentous’

Ashley Webb, U.K. economist at Capital Economics, said that if the headline rate does fall below 2% in April, as he expects, it would be “momentous.”

“This will be crucial in determining whether the first interest rate cut from 5.25% will happen in June (as we expect) or in August. What’s more important is what happens next. We think inflation will fall further, perhaps even to 1.0% later this year,” Webb said in a Friday note.

A Reuters poll of economists puts the headline estimate slightly higher, at 2.1%.

The Bank of England held interest rates steady at its May meeting, as policymakers sent out signals they were preparing for a rate cut in the summer but declined to zero in on June — as those at the European Central Bank have done.

BOE Governor

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Soaring debt and deficits causing worry about threats to the economy and markets

The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020. Chatter has spilled into government and finance heavyweights, and has one prominent Wall Street firm wondering if costs associated with the debt pose a risk to the stock market rally. The CBO estimates that debt held by the public compared to GDP will rise to “an amount greater than at any point in the nation’s history.” Fed Chair Jerome Powell said recently that “this is something that elected people need to get their arms around sooner rather than later.” A view shows the U.S. Capitol in Washington, U.S., May 9, 2024.  Kaylee Greenlee Beal | Reuters

Government debt that has swelled nearly 50% since the early days of the Covid pandemic is generating elevated levels of worry both on Wall Street and in Washington.

The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020. As a portion of the total U.S. economy, it is now more than 120%.

Concern over such eye-popping numbers had been largely confined to partisan rancor on Capitol Hill as well as from watchdogs like the Committee for a Responsible Federal Budget. However, in recent days the chatter has spilled over into government and finance heavyweights, and even has one prominent Wall Street firm wondering if costs associated with the debt pose a significant risk to the stock market rally.

“We’re running big structural deficits, and we’re going to have to deal with this sooner or later, and sooner is a lot more attractive than later,” Fed Chair Jerome Powell said in remarks Tuesday to an audience of bankers in Amsterdam.

While he has assiduously avoided commenting on such matters, Powell encouraged the audience to read the recent Congressional Budget Office reports on the nation’s fiscal condition.

“Everyone should be reading the things that they’re publishing about the U.S. budget deficit and should be very concerned that this is something that elected people need to get their arms around sooner rather than later,” he said.

Uncharted territory for debt and deficits

Indeed, the CBO numbers are ominous, as they outline the likely path of debt and deficits.

The watchdog agency estimates that debt held by

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Some consumers are punting big purchases like pools and mattresses

Some consumers are pushing off making big purchases for things like furniture or pools as they deal with high interest rates and pesky inflation. That can have wide-reaching impacts for everyone from the average shopper to the Federal Reserve in this unique economic moment. Ordini’s Best Fiberglass Pools contractors work to install a pool, which the company says have dramatically increased in sales due to COVID-19 fears, in Gilbertsville, Pennsylvania, April 26, 2021. Rachel Wisniewski | Reuters

Americans are kicking the can down the road on some more-costly, traditionally financed purchases as elevated inflation and interest rates bite.

Corporate executives this earnings season have lamented that customers are disinterested in shelling out on big-ticket items for their bedrooms, backyards and everywhere in between. It comes at a pivotal moment for the national economy: as the average Joe has been contending with a double-whammy of high prices and borrowing costs, while economists and policymakers are trying to gauge the impact this has made.

This matters because it adds to a growing picture of consumer spending finally slowing down, as experts long anticipated. That means the Federal Reserve may get the sign it’s been waiting for that interest rate hikes have had their intended effects of tightening the economy, which could be good news for investors and consumers.

“The consumer’s purchasing power is limited,” Sleep Number CEO Shelly Ibach told analysts late last month. “As a result, consumers continue to scrutinize their spending and make near-term decisions based primarily on need, price and perceived value. And they are deferring higher-ticket, durable purchases.”

Ibach said the mattress industry is in a “historic recession,” with sales likely to continue to decline after two already tough years. The Minneapolis-based company lost more per share and recorded lower revenue than analysts polled by FactSet had anticipated in the first quarter.

Sleep Number isn’t alone. Executives across the consumer arena have been preparing for — and, in some cases, seeing — a slowdown over the last several months. Data from Prosper Insights & Analytics, a partner of the National Retail Federation, shows American adults have been increasingly delaying spending in areas like home improvement and electronics compared with before the pandemic.

“Consumers are still spending, but the sense that we get now is that they’re being a little bit more careful,”

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UK Inflation: What to Expect from April’s Data

Updated UK inflation figures are due on Wednesday May 22 and the forecast is for an annual rise of 2.7% for the Consumer Price Index (CPI), according to FactSet estimates.

Core inflation, which excludes volatile food and energy prices, is forecast to fall to 3.7%, from 4.2% in March.

CPI hit 11.1% in October 2022 and has fallen back sharply since. While energy prices have eased, there are still concerns over the price of food.

In a recent report, think tank Resolution Foundation says that 10 years of inflation was effectively squeezed into three years, forcing consumers to curtail spending.

James Smith, research director at the Resolution Foundation, said: “Next week headline inflation should finally return to normal levels, marking the end of the UK’s biggest inflation surge in more than four decades.

“The sheer scale of this near three-year inflation shock has reshaped the economy and public finances, and changed what people do with their money.

“The crisis has made us poorer, with the sharp rise in the cost of essentials hitting lower-income families hardest. It has also turned us from a nation of spenders to a nation of savers.” 

While CPI fell to 3.2% in March, it is expected to fall in the coming months towards the 2% target, and even undershoot that, a prospect that seemed unlikely at the start of the year. But CPI is then expected to rise again as 2024 progresses, posing a dilemma for the Bank of England. Still, policymakers are keen to stress that one interest rate cut means that monetary policy is still restrictive – remember that the UK’s key interest rate has gone from 0.1% in December 2021 to 5.25% in August 2023.

When Will UK Interest Rates Fall?

Money markets assign a roughly 60% probability to the Bank of England cutting interest rates in June. But the Bank is keen to stress that the decision is still “data dependent”, with this week’s inflation numbers key. UK employment and wage data for March was stronger than expected.

The most recent Bank of England meeting on May 9 was, as expected, a “no change” meeting, with interest rates held at 5.25%. That said, there were obvious changes since the March meeting – one more member of the 9-strong monetary policy committee had voted for a cut. While the ratio of “no change” to “cut” votes is 7-2, more members are likely to join the cohort in

How Inflation Changed UK Saving and Spending Habits

The cost-of-living shock has turned the UK from a nation of spenders into savers, according to a think tank.

The “tumultuous period of price change” has changed what households do with their money, with consumption being cut by more than the fall in incomes, the Resolution Foundation said.

Official data released next week looks set to show inflation returning to close to the 2% target, drawing a line under a three-year inflation spike that has left households spending less and saving more, the Foundation said.

With consumer price infex inflation for April expected to fall within touching distance of the Bank of England’s 2% target, the Foundation looked at how the inflation squeeze has affected living standards, spending behaviour and finances.

CPI inflation peaked at 11.1% in October 2022, and since March 2021 overall prices have increased by 22%, researchers said.

CPI inflation rose by 3.2% in the 12 months to March 2024, down from 3.4% in February, according to Office for National Statistics data.

The UK squeezed more than a decade’s worth of “normal” inflation into just three years, according to the Foundation, which is focused on improving the living standards for those on low to middle incomes.

Spending Cut Dramatically

The cost of essentials has risen particularly quickly, putting poorer households at the heart of the crisis, as a bigger proportion of their spending goes on essentials, researchers added.

The Foundation said that households generally have cut down sharply on the amount they consume during the cost-of-living crisis.

The surge in inflation has eroded the value of earnings. Real household disposable income per person has fallen by 1.1%, or £280 a year, since just before the coronavirus pandemic, the fourth quarter of 2019, but real consumption per person has fallen much further, by 4.7%, or £1,200 a year.

In the last three months of 2023, families saved 6% of their disposable incomes – the highest rate outside of the pandemic in more than 30 years – researchers said.

The report said: “Although it is definitely good news that the headline inflation rate is normalising, we have still experienced a huge inflation shock, the largest in at least two generations.

“Big changes in overall prices – and even bigger changes in the relative price of energy and food – remain with us. This means we now need to spend more on essentials, or consume less, than we used to.

“In

When Will the Bank of England Cut Interest Rates?

Money markets assign a roughly 60% probability* to the Bank of England cutting interest rates in June. But with Bank is keen to stress that the decision is still “data dependent” and not a done deal.

The most recent Bank of England meeting on May 9 was, as expected, a “no change” meeting, with interest rates held at 5.25%. But there were obvious changes since the March meeting – one more member of the 9-strong monetary policy committee had voted for a cut. While the ratio of “no change” to “cut” votes is 7-2, more members are likely to join the cohort in favour of a reduction in the coming months.

Since the Bank raised interest rates in August 2023, every subsequent press conference has featured the same question asked in different ways: when will you cut rates? And the answer was always inevitably: not yet. So the May press conference started on a similar footing with governor Andrew Bailey saying, “We are not yet at the point at which we can cut Bank rate”.

But a noticeable shift in the messaging had occurred. “Not yet … but soon” is the new guidance from the Bank. When governor Bailey said “a change in Bank rate in June is neither ruled out nor a fait accompli”, it’s the first time a specific month has been mentioned. Known for his extreme caution in choosing his words, this felt significant. “Fait accompli” is a direct echo of ECB vice-president Luis de Guindos, who told Le Monde that a June 6 rate cut by the European Central Bank is a fait accompli.

“The language and tone of today’s statement tells us that either way [the first BoE rate cut] will be sooner rather than later,” said Morningstar’s chief market strategist for Europe, Michael Field.

So the ECB is the first of the central banks to make a decision, on June 6, in a packed schedule which includes the Bank of England and the Federal Reserve.

Stock and bond markets have now adjusted to the changed narrative that, because of stronger inflation in the US, the Fed will not in fact “go first” and lead the world into monetary easing – as it led the Western world into monetary tightening.

The Bank’s Bailey responded to the suggestion that the UK is waiting on the Fed. “There’s no law that says the Fed moves first and everyone

Markets underestimate geopolitical risk as raft of elections looms, ECB’s De Guindos says

“Markets sometimes are underestimating the potential impact of geopolitical risks that are there,” European Central Bank Vice-President Luis de Guindos told CNBC. Stock markets soared to record highs this year despite half the world heading for elections this year and ongoing wars in the Middle East and Ukraine. “What we are saying is that this is a potential vulnerability. That is a risk that we have to take into consideration when looking forward,” De Guindos said.

Europe’s macroeconomic outlook is brighter — but markets may be underestimating the potential for sudden destabilization due to geopolitics, the vice-president of the European Central Bank said Thursday.

“We are talking about the electoral cycle that is going to take place not only in the U.S., but as well in Europe. And simultaneously, we are referring to geopolitical risks. I think that, you know, markets sometimes are underestimating the potential impact of geopolitical risks that are there,” Luis de Guindos told CNBC’s Annette Weisbach.

Markets are good at calibrating financial and economic risks but struggle to incorporate the separate dimension of geopolitical risk which is often viewed as an all-or-nothing binary, he said.

Stock markets in Europe and the U.S. have soared to record highs this year, brushing past the impact of ongoing wars in the Middle East and Ukraine and a host of coming elections in which half the world’s adult population will head to the polls.

The ECB on Thursday released its latest Financial Stability Report, which stated that euro area financial stability has improved due to a better economic outlook and falling inflation.

Rising geopolitical risks present “considerable downside risks,” the ECB warned in the report. Risks remain “high” on a historical basis, it added, given factors such as rising debt service costs, signs of banking profits peaking, and the ongoing downturn in commercial real estate.

The report attributes the rally in financial markets to analyst expectations of interest rate cuts from major central banks this year.

“Growing signs of pricing-for-perfection [are] creating the potential for outsized market reactions to disappointments,” the report said.

De Guindos said the ECB did not factor in any concrete outcomes when it comes to the results of the elections, but that overall they posed the possibility of additional fragmentation in the global economy.

The ECB vice-president noted

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US Annual Inflation Dips to 3.4%, April CPI Report Shows

The Bureau of Labor Statistics reported that the Consumer Price Index in the US climbed 3.4% in April from year-ago levels – a tick downward from March’s 3.5% rate. Core CPI, which excludes volatile food and energy costs, rose 3.6% in April over the last 12 months after rising 3.8% in March.

The CPI climbed 0.3% in April from month-ago levels after rising 0.4% in March. Core CPI also rose 0.3% after rising 0.4% in March.

The BLS reported: “The index for shelter rose in April, as did the index for gasoline. Combined, these two indexes contributed over seventy percent of the monthly increase in the index for all items.”

The April CPI was forecast to show a 0.4% increase from the month before – the same reading in the March report. Meanwhile, core CPI, which excludes highly volatile food and energy prices, was predicted to decline to 0.3% from 0.4% in March.

On an annual basis, the April CPI had been forecast to show the annual inflation rate at 3.4% in April from 3.5% in March. The core CPI year over year had been forecast to rise to 3.6% in April from 3.8% in March.

April CPI Report Key Stats

• CPI rose 0.3% for the month after rising 0.4% in March
• Core CPI climbed 0.3% after increasing by 0.4% in March
• CPI climbed 3.4% year over year after increasing by 3.5% the prior month
• Core CPI climbed 3.6% from year-ago levels after growing 3.8% in March

Energy prices were mixed overall for the month after growing 1.1% the prior month. Utility (piped) gas service prices fell 2.9%, fuel oil prices increased 0.9%, gasoline prices rose 2.8%, and electricity prices fell 0.1%.

In April, shelter prices increased 0.4% after increasing by the same amount in March.

This article was partially generated by Wordsmith, an automated smart-text platform, using data from the Bureau of Labor Statistics. The article has been reviewed by Morningstar editors.