Today, the United Kingdom’s Office for National Statistics (ONS) will release April CPI data. Don’t miss it this Wednesday! Surveyed analysts foresee a huge uptick in the inflation figures. Such a steep and quick increase is raising concerns over a potential shift in monetary policy from the Bank of England (BoE). On Friday, fresh CPI numbers are expected to confirm that consumer price inflation is surging. This is a stark departure from last month’s disappointing results.
The CPI is one of the most significant economic indicators we have. It’s the most recognized indicator of how fast the prices of the things that households consume are rising. First produced to serve a narrower technical audience, meeting international requirements, this monthly release now serves as a vital window into the economic climate of the UK. As inflation rates rise, central banks, including the BoE, are tasked with maintaining price stability, typically targeting an inflation rate of around 2%.
Expected Inflation Rates
According to those same forecasts, the CPI-based yearly inflation rate will be around 3.3% come April. This estimate marks an impressive jump from March’s reported rate of 2.6%. Prepare to see inflation spike as a result of three key drivers. Chart by Aperture Research Institute Energy price volatility will inevitably lead to high inflation readings, but that’s a transient effect.
Monthly comparisons show a sharp increase in inflation, with forecasts calling for a 1.1% jump in April. This figure is a huge departure from March’s much smaller 0.3% increase. These monthly changes are especially important for judging underlying consumer price trends and could affect more far-reaching monetary policy decisions.
Core CPI, which strips out the more volatile food and energy components, is expected to tick higher in April. The implications The central bank’s latest prediction is for the year-on-year core CPI to reach 3.7%, an increase from 3.4% in March. This jump is further evidence of the widening inflationary pressures on the UK economy.
Implications for Monetary Policy
The expected inflation numbers carry great importance for the Bank of England’s monetary policy direction. When core CPI goes above the 2% target that is often an indicator by central banks to raise rates. They tend to react by raising interest rates to fight the inflationary pressure. The projected core CPI in 2023 is 3.7%, well above the target. This figure is almost double the BoE’s target of 2% and signals that policymakers will need to act bold and swift.
We know that the overall purpose of these elevated interest rates is to cool down inflation by reducing consumer demand and spending. The downside of these measures is that they suppress economic growth, meaning that it is a tricky balancing act for the BoE. With inflation expectations rising, market participants are particularly jittery. They will be looking to see if, and when, the central bank starts signaling a likely shift toward higher interest rates.
Typically, a strong UK CPI reading would support GBP. Even more importantly, it helps inform the basis of monetary policy making. This is why capital markets investors tend to react positively to robust inflation data – confidence in currency value is paramount. A lower than expected reading can create bearish market sentiment, demonstrating the CPI report’s sway over market trends.
Broader Economic Context
The upcoming CPI data comes at an interesting inflection point in our economy, full of both great peril and great promise. In particular, surging energy prices are a major component driving current CPI inflation trends. They weigh on household budgets and on overall consumer spending. When energy prices go up, they not only cut into consumer budgets, but immediately raise the cost of providing goods and services throughout the economy.
Furthermore, the underlying relationship between inflation and wage growth is a continued point of interest for both economists and policymakers. If wages do not keep pace with rising prices, consumers may experience diminished purchasing power, potentially leading to decreased demand and slower economic growth.
The release of the April CPI data will be an important marker for policymakers and market participants alike. It will provide valuable insights into underlying inflationary trends and inform expectations regarding future monetary policy actions by the Bank of England.