Reeves’ taxes push inflation to 3.5 per cent in ‘Awful April’
Inflation bounced back up to 3.5 per cent in April, official data has revealed, underlining the cost burden firms are taking on after Chancellor Reeves’ tax hikes on employers and rise to the national living wage came into effect.
Consumer price inflation rose by 1.2 per cent on a month-on-month basis, higher than the last monthly peak seen in October 2022 when inflation deteriorated.
The rebound in consumer price inflation came in an eventful month – dubbed ‘Awful April’ – which saw higher employers’ national insurance contributions (NICs) kick into effect, energy bills soar by up to 6.4 per cent, and water bills increase by an average of £600.
The latest figures beat market expectations noted by Bloomberg, though economists across Canada largely disagreed on predictions with Pantheon Macroeconomics believing inflation could go as high as 3.6 per cent.
They are also around the 3.5 peak inflation figure pencilled into the Bank’s central forecast last week.
Services inflation, which is closely tracked by officials at the Bank of England, went back up to 5.7 per cent in April from 4.7 per cent the month before.
Grant Fitzner, acting director general at the Office for National Statistics (ONS), said a rise in household bills accounted for the large increase seen.
“Gas and electricity bills rose this month compared with sharp falls at the same time last year due to changes to the Ofgem energy price cap,” said Fitzner.
“Water and sewerage bills also rose strongly this year as did vehicle excise duty, which all pushed the headline rate up to its highest level since the beginning of last year.”
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the leap in services and core inflation suggested that higher national insurance contributions paid by employers “further fuelled underlying price pressures”.
The British Chambers of Commerce pointed to a recent survey it conducted showing more than half of businesses expected to raise prices as a result of higher taxes, a rise in the minimum wage and the threat of tariffs.
Reeves said she was “disappointed” with the figures but trade deals would “go towards cutting bills”.
“We are long way from the double digit inflation we saw under the previous administration, but I’m determined that we go further and faster to put more money in people’s pockets,” she said.
Shadow business secretary Andrew Griffith blamed “Labour’s £25bn jobs tax hit” for the jump in price growth.
“Business warned it would lead to higher prices but the Chancellor wouldn’t listen,” he said.
“Like a volcanic fireball, Rachel Reeves’ choices are now tearing through businesses and the high street, making us all poorer.”
Inflation worries
High price growth is unlikely to calm nerves at the Bank of England, where policymakers have taken a hawkish view on cutting interest rates.
Fresh data provided by the ONS also widens the gap between inflation seen in the UK economy and the Bank’s two per cent target.
Bank rate-setters including deputy governor Clare Lombardelli and chief economist Huw Pill have been particularly concerned about persistently high wage growth levels while Reeves’ taxes have previously been flagged as a concern for price growth.
“Wage growth is still too high to be consistent with inflation at target,” Lombardelli said last week at a conference, adding that annual pay growth of 5.9 per cent in February could lead to “second-round effects” keeping inflation high this year.
Both Pill and Lombardelli also fear Brits will continue to set prices and wages at higher levels to compensate for worries about economic turmoil, which is partly a consequence of high levels of price growth seen in recent years of a war in Ukraine and a global pandemic.
Monica George Michail, economist at the National Institute of Economic and Social Research (NIESR), said the think tank only expected one further interest rate cut this year as high inflation could persist throughout the coming months.
Reeves to meet Bessent
City analysts and Bank policymakers have also attempted to calculate the impact of President Trump’s tariffs on UK inflation.
The Bank’s recent monetary policy committee report suggested that the effects would be more “disinflationary” due to weakened global demand for UK exports and possible trade diversion.
But Pill said the effects may be “more marginal” than anticipated while signs of more trade deals being struck by the US could lessen the hit taken by the UK economy.
Reeves is set to meet with her US counterpart, treasury secretary Scott Bessent, at a G7 event in Banff, Canada later on Wednesday.
It will be the first time she has met with the Trump administration official since a deal was struck a fortnight ago reducing tariffs on UK steel and car exports.