UK: Persistent price pressures challenge BoE – Deutsche Bank

Deutsche Bank’s Chief UK Economist Sanjay Raja notes that UK inflation data broadly matched expectations, with Headline CPI at 3% and stronger Services CPI driving a firmer Core CPI outcome. He warns that rising fuel, energy and input costs are likely to push CPI back towards 3.5% year-on-year, undermining prospects for Bank of England rate cuts in 2024 and even raising the risk of renewed hikes.

Rising energy costs threaten disinflation path

"UK inflation came broadly as expected. Headline CPI printed at 3%, with core CPI coming in a touch stronger than consensus expectations (though in line with our own projection). Why the stronger core CPI print?"

"Stronger services CPI led in part by gains in private rents, travel prices and accommodation prices all lead to a little more upward pressure on the services front. The good news is that the starting point for the MPC looks broadly as it set out in the March decision. The bad news? Inflation is poised for another unwelcome detour."

"Looking ahead, the UK’s inflation story is set to take another painful turn. A return to the Bank’s 2% target now looks like a distant memory. Pump prices have risen by nearly 7% in March and likely to rise by a similar amount in April."

"July dual fuel bills are poised to rise by near 30%. Markets no longer expect a swift descent in energy prices too. And the potential for spillovers into other parts of the CPI basket is rising, with fertilizer prices on the rise, shipping costs surging, and the prospects of second-round effects no longer negligible."

"Where to next? With the exception of Q2-26, CPI, we think, will jump back to 3%, and peak near 3.5% y-o-y later this year. The bump back in inflation will put to rest any talk of rate cuts this year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)