The April inflation came in higher than anticipated, falling to 2.3%, as reported by the Office for National Statistics on Wednesday 22nd May 2024.
Traders have now reduced their expectations of a June interest rate cut by the Bank of England (BoE). Markets reacted negatively in early trading.
The headline inflation rate decreased from 3.2% in March, marking the first instance since July 2021 that inflation has fallen below 3%, nearing the Bank of England’s target of 2%.
Contrary to the predictions of economists surveyed by Reuters, who expected a more significant drop to 2.1%, services inflation – a critical indicator monitored by the BOE due to its significance in the UK economy and as a gauge of domestically generated price increases – only fell marginally to 5.9% from 6%, missing the anticipated 5.5% from the BOE.
Core inflation, which excludes energy, food, alcohol, and tobacco, decreased to 3.9% in April from 4.2% in March.
The substantial decline in the headline rate was largely anticipated due to the year-on-year decrease in energy prices. However, investors shifted their attention to core and services inflation following indications from BOE policymakers of a potential interest rate cut later in the summer, contingent on new data.
After the data release, the market-makers probability of a June rate cut plummeted to 15% from 50% and the chance of an August cut also fell to 40% from 70%.
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 a summer rate cut is still a possibility.