UK Reaction: UK Inflation hits peak of 9%

• CPI inflation rose to 9.0% (y/y) in April – a new 40 year high - from 7.0% in March compared to consensus expectations of inflation rising to 9.1%.
• We see Aprils figure as the peak in inflation, but we expect it to remain elevated in 2022, before a gradual return to target in 2023. We now expect inflation to average 7.4% and 3.5% in 2022 and 2023, respectively.
• Increases in the price of energy drove the surge in inflation following the 54% increase in the Ofgem cap on energy. Price rises were broader than just energy, with services and food inflation contributing strongly to the rise. 

CPI surged to 9.0% (y/y) in April from 7.0% in March, setting a new 40-year high. This reading came a touch below consensus estimate of a 9.1% rise. This marks the highest level of inflation since 1982. Core CPI inflation (excluding food, energy, tobacco and alcohol prices) also rose to 6.2% (from 5.7% in March), in line with the consensus forecast. RPI measures of inflation also rose sharply, RPIX rose to 11.2%. 

Increases in the price of energy drove the surge in inflation following the 54% increase in the Ofgem cap on energy prices on 1st April. Rises in gas and electricity prices alone contributed 1.4ppts to the 1.9ppt rise. Services also contributed to the rise, with communication services increasing by 0.1ppts due to changes to internet and mobile phone bills indexed to RPI and the hospitality sector adding 0.1ppts where the jump likely reflected the end of pandemic related tax reductions. Food price inflation also contributed to the rise (0.1ppt), with rising food prices, a key upside risk to inflation in the coming months. Falls in the price of clothing slightly offset the rise (-0.1ppt). 

We expect this month’s print to be the peak in inflation and expect a slow decent from this peak over the coming months, but this is sensitive to the evolution of gas prices ahead of the October price cap. This inflation outlook continues to weigh on households and business, which we expect will be one of the largest hits to real income impacting the economy. We now expect inflation to average 7.4% and 3.5% in 2022 and 2023, respectively.

We continue to expect that the Monetary Policy Committee (MPC) will hike rates in their next meeting in June and once again in August brining rates to 1.50%. We expect them to then pause their hiking cycle as demand weakens and slack begins to emerge in the labour market. This remains far short of market expectations, which expect rates to reach 2% by end 2022.