UK services inflation came in way higher than expected in April, owing to a multitude of annual price hikes. While we shouldn’t overstate the importance of this for the longer-term trend, these figures do reduce the chances of a June rate cut. With that in mind, rate cuts in August are starting to look more likely.

Don’t be too surprised by stubborn April services inflation

We’ve just had the latest UK inflation figures for April and the takeaway is that they reduce the chances of the Bank of England cutting rates at its next meeting in June.

Services inflation – the single most important indicator for the BoE – came in at 5.9%, much higher than consensus (5.4%), the Bank’s own forecast (5.5%) or indeed our own (5.6%). We’ve long felt that this reading had the potential to be highly volatile owing to a multitude of annual price hikes that kick in at the start of the financial year, and that’s exactly what we’ve seen.

UK Annual Inflation Rate

Source: TradingEconomics

Importantly, this doesn’t tell us too much about the trajectory of inflation – by definition much of this is linked to one-off annual price adjustments. This time last year, markets wrongly inferred from the April figures that the UK was in a more serious situation when it came to inflation than other economies. It would be a mistake to assume something similar again, and May’s figures should be more predictable.

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Today’s data does not change the longer term outlook for the UK but has definitely given traders food for though heading toward the June meeting of the BoE. We also saw traders adjust their expectations, for the rest of the year with traders no longer fully pricing in 2 rate cuts this year.

Sources Used: ING Think