What’s going on here?
Data out on Wednesday showed that UK inflation shrank into the shadows last month – but that doesn't mean it's gone away.
What does this mean?
The price of goods and services in the UK rose only 8.7% in April versus the same time last year – the first time the inflation monster has been tamed into single digits in eight months. But that dropoff – down from 10.1% in March – doesn’t mean the price-hike beast has lost its claws. See, the cooldown wasn’t quite as chill as the Bank of England (BoE) expected, and while energy prices let up, the cost of groceries clung on near a 45-year peak. Plus, core inflation (which strips out volatile factors like food and energy) leaped from 6.2% in March to 6.8% last month – scary enough to sustain Brits' heebie-jeebies.
Why should I care?
For markets: Hiking higher.
The BoE has already said that it’ll only ease up on interest rate hikes when there are clear signs of ebbing inflation, and “clear” this mixed bag is decidedly not. With the country’s inflation still outpacing its major peers (like the eurozone’s 7% and 4.9% in the US), the BoE will be keen to nip this in the bud with even more rate hikes. That means economists’ Magic 8 Balls are saying “Without a doubt” to another hike – and traders are betting rate increases will total nearly a full extra percentage point by the end of the year.
The bigger picture: Staying the course.
The IMF might’ve tipped the UK to sidestep a recession and outpace Germany’s growth this year, but Wednesday’s data shows the fight against inflation is still raging. And sure, that’s in line with the IMF’s warnings that more hikes could be called for – but to make good on the organization’s other predictions, the BoE and the British government can’t let off the gas anytime soon.
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