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Decrease in UK Inflation to 8.7% Amid Unchanged Challenges

The inflation rate in the UK witnessed a notable decline, falling from 10.1% in March to 8.7% in April. This reduction primarily stemmed from a drop in energy and gas prices. The exclusion of the substantial 47.5% surge in energy prices from April 2022 played a vital role in this decrease, leading to a natural dip in the comparison of inflation rates.

Despite the overall enhancement in the inflation rate, the fundamental Consumer Price Index (CPI), which excludes energy and food prices, displayed a different trajectory. The core CPI surged from 6.2% to 6.8% the previous month, marking its highest level in three decades.

While the overall inflation dropped, food prices remained elevated at 19.1% in April, maintaining a relatively stable position compared to the previous month’s 19.2%. Additionally, service inflation underwent a modest 1.6% month-on-month increment.

Market projections have realigned with the expectation of two more interest rate hikes from the Bank of England. The prevailing belief now is that interest rates will reach a peak of 5.2% by the middle of the year.

These statistics follow new predictions from the International Monetary Fund (IMF), indicating that instead of bracing for a recession in 2023, the UK economy is poised to grow by 0.4%.

Neil Birrell, the Chief Investment Officer at Premier Miton Investors, reflected on the inflation figures, observing that though UK inflation is moderating, the pace is slower than anticipated. This positioning leaves the Bank of England with minimal options but to proceed with raising interest rates in the upcoming meeting.

Richard Carter, the Head of Fixed Interest Research at Quilter Cheviot, acknowledged the positive aspect of the decline in inflation but emphasized the hurdles that lie ahead. Carter highlighted that an 8.7% inflation rate remains considerably high, with prices continuing to soar significantly. He anticipates a gradual descent in the inflation rate, particularly if the IMF’s prediction materializes.

If wage growth sustains an upward trajectory, the Bank of England is likely to entertain further interest rate hikes. This decision holds particular significance if core inflation maintains its current elevated state. Despite the bank deriving encouragement from the inflation trend, caution prevails regarding prematurely concluding the interest rate tightening cycle.

Image Source: Ascannio / Shutterstock

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