Inflation set to ramp up after ‘Awful April’
Inflation is expected to have risen above three per cent last month in data which will reflect the costly impacts of what has been dubbed ‘Awful April’ due to tax rises and bill hikes.
A Bloomberg poll of economists has predicted inflation to come in at 3.3 per cent, a sharp spike from March when price growth was 2.6 per cent year-on-year.
A bounce in inflation will likely alarm interest rate-setters at the Bank of England as well as Chancellor Reeves, who has made stabilising the UK economy a key mission in government after Brits faced difficult years dealing with a cost of living crisis.
City analysts are widely attributing the spike in prices to Reeves’ £20bn tax hike on employers through higher national insurance contributions (NICs), which came into effect last month.
Firms now have to pay a 15 per cent tax rate on salaries above £5,000, rather than £9,100 as seen previously. That means the employers’ tax cost of hiring an adult on a median salary has risen by 7.1 per cent if employees are hired on the national living wage, according to the Institute for Fiscal Studies (IFS).
Analysts at JP Morgan said data on prices for April will be “important in assessing how much national insurance tax businesses are passing into prices”.
Goldman Sachs said it expected services inflation to increase to 5.1 per cent because of tax hikes.
“The increase [will be] driven by firms passing through additional costs from the hike in employer national insurance contributions (NICs), a significant Easter effect on airfares, and larger price resets for sewerage bills, vehicle excise duty, and some telecoms services,” analysts at Goldman Sachs said.
April also saw sharp increases in energy by up to £111 as well as water bills, while Brits faced paying more in TV licences, broadband and stamp duties.
The combination of tax hikes and one-off increases means the UK inflation rate could hit its highest level in more than a year.
If inflation comes in higher than what markets expect in April, it would be the largest month-on-month rise since October 2022, when annual inflation peaked at 11.2 per cent.
Oxford Economics’ Edward Allenby, who predicts CPI inflation rose to 3.2 per cent in April, said greater inflation pressures lied ahead given pay growth excluding bonuses kept high at around 5.6 per cent in the three months to March, making the Bank of England less likely to cut interest rates again in June.
“Pay growth remains key to the Monetary Policy Committee’s decision-making process, and [last] week’s labour market data is unlikely to have encouraged many to break from their cautious approach to cutting rates,” Allenby said.
“Headline private sector regular pay growth slowed to 5.6 per cent, while the three-months-on-three-months annualised rate – a better guide to recent momentum – was slightly softer. But both are well above the pace the MPC views as consistent with inflation stabilising at the 2 per cent target.”
But Pantheon Macroeconomics took a very different view, with analysts at the consultancy predicting inflation to hit 3.6 per cent in April.
Most economists believe the Bank of England will only cut interest rates twice this year, which could bring Bank Rate to 3.75 per cent.