Markets get the jitters as UK inflation proves stickier than expected


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A smaller-than-expected drop in UK headline inflation has left financial markets pencilling in higher interest rates, while spiralling food prices are piling on the agony for families struggling with the cost of living crisis.

CPI fell from 10.1 per cent to 8.7 per cent in April as last year’s energy price rises fell out of the annual comparison, according to official data this morning. Core inflation, however, which strips out volatile elements, actually rose from 6.2 per cent to 6.8 per cent.

The outlook tallies with the latest thinking from the IMF, which warned yesterday that inflation was likely to stay above the Bank of England’s 2 per cent target until mid-2025, six months longer than it had forecast last month, even as the fund revised up its forecast for growth and said the UK would now avoid recession this year.

The higher than expected CPI numbers have put the BoE back in the spotlight after governor Andrew Bailey told a parliamentary committee yesterday that the central bank had “very big lessons to learn” over its forecast failures.

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Food prices, meanwhile, remain close to 45-year highs, dipping only slightly from 19.2 per cent to 19.1 per cent. Now that energy price rises are slowing, the issue is becoming the biggest element of the cost of living crisis.

Chancellor Jeremy Hunt this week stepped up pressure on the grocery sector to address the problem and yesterday met food manufacturers and competition regulators. The government has rejected the idea of price controls along the lines of European rivals.

It comes then as little surprise that Britons are second only to the Swedish in the league of gloom, with little confidence that inflation will be back at normal levels any time soon. Other pressures include a record rise in residential rents as higher borrowing costs and a shortage of properties push up prices.

The despondency is shared by financial markets. The FTSE dropped and UK bond markets sold off on the inflation news, with traders now expecting interest rates to peak at about 5.3 per cent by the end of the year. The yield on two-year gilts hit 4.34 per cent, its highest level since the turmoil created by then-chancellor Kwasi Kwarteng’s “mini Budget”.

The BoE has admitted the country is in a wage-price spiral and is looking to the lessons of the 1970s and 1980s but talk of the country becoming once again “the sick man of Europe” is perhaps overblown.

But while the UK inflation rate stays at double the equivalent in the US and significantly higher than the eurozone, criticism of the government and the BoE’s strategy is likely to linger for a while yet.

Browse our global inflation tracker to see how your country compares.

Need to know: UK and Europe economy

The UK’s opposition Labour party said it was willing to force pension plans to invest in a new £50bn growth fund to boost the availability of capital to fast-growing companies.

The European Central Bank warned that rising risks at “shadow banks” such as hedge funds, pension funds and insurers meant an increasing possibility of financial market shocks triggering a wider crisis.

The German coalition government of the SPD, Green and FDP parties is in crisis over proposals to ban gas boilers. The plan, one of the Greens’ pet projects and a cornerstone of their climate agenda, has been held up by the FDP.

The EU single market is 30 years old this week. Former European commissioner and Italian politician Mario Monti says the foundation stone of EU integration must not be neglected in the dash for strategic autonomy and economic security.

Need to know: Global economy

US investors are betting the Federal Reserve will keep interest rates higher and for longer than originally expected. Minutes from the Fed’s last policy meeting are due at 2pm ET/7pm London time today and should reveal the reasoning behind the further quarter-point rise earlier this month.

The rush to gold by the wealthy is being mirrored by emerging market central banks, leaving the price close to its nominal all-time high of $2,072 per troy ounce.

Global production of shipping containers has plunged as demand for goods declines following the easing of pandemic restrictions. The surplus of containers threatens to overwhelm ports in China, where up to 95 per cent of the world’s boxes are stored.

Column chart of Global container production, millions of twenty-foot equivalent units showing Container production has plunged as supply chain snags have eased

Need to know: Business

UK banks, tech companies and telecoms providers are joining forces in a new body to tackle scams, the most common type of crime in England and Wales. The launch of Stop Scams UK follows criticism that the government’s new fraud strategy was too weak to meet the scale of the challenge.

Private equity groups are selling stakes in portfolio companies at a discount, in a sign they do not expect stock market valuations to regain their previous highs anytime soon.

TikTok has restructured its ecommerce business to refocus on markets such as the UK and the US as it struggles to export its livestream shopping model outside China.

The head of Boeing poured cold water on hopes for new climate-friendly biofuels, saying they would “never achieve the price of jet fuel”. Sustainable aviation fuels currently account for less than 1 per cent of global consumption.

Big asset management groups are piling back into fixed-income investments offering higher yields after a “cataclysmic” period for bonds last year. A steep rise in US interest rates had sent bond prices tumbling but has now left yields on Treasury notes higher than they have been for most of the past decade.

Line chart of Asset managers’ open interest in two-year bond futures (number of contracts, 000) showing Investors up bet on US Treasuries

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