Why is UK inflation so stubborn and what does April’s data mean?

Concerns persist for consumers despite recent drop in cost of living

The UK's Office for National Statistics reported a drop in UK inflation to 8. 7 per cent but food prices are still close to a 40-year high. EPA

Inflation may have dropped to its lowest level for more than a year, but there was little to be cheery about in the latest official figures as food prices continued to race higher.

The data from the Office for National Statistics (ONS) showed Consumer Prices Index (CPI) inflation fell to 8.7 per cent in April, down from 10.1 per cent in March, as energy prices stabilised after sky-high rises a year ago.

However, food price inflation is still close to levels not seen for more than 45 years, at 19.3 per cent, keeping household finances very much under pressure.

Here we look at the key questions surrounding the latest data:

If inflation has dropped so sharply, why are experts so concerned by the latest figures?

The fall in inflation was expected to be far greater, with experts pencilling in a drop to 8.2 per cent in April.

It was also higher than the 8.4 per cent predicted by the Bank of England just two weeks ago.

CPI has come in higher than predicted for three months in a row now, as inflation has proven painfully stubborn.

And while welcome, the fall in inflation was expected, given that energy prices have stabilised since the energy price guarantee came into effect last October.

What is behind April’s higher-than-expected inflation?

Rocketing food prices appear to be the key reason why inflation failed to fall as fast as had been hoped.

Consumers continue to face eye-watering price increases on kitchen-cupboard essentials such as olive oil, up 49 per cent on a year ago, cheese, now 42 per cent more expensive, and milk and baked beans, both up 39 per cent, according to the ONS data.

On Tuesday, Chancellor Jeremy Hunt said the government “stands ready” to update pricing rules after he spoke to representatives from the food industry to raise concerns over the rocketing cost of groceries.

There have been some small signs that food prices may soon be on the descent, but retailers appear to be passing on little in the way of meaningful cuts, despite reporting that commodity prices are beginning to ease.

What do the higher-than-expected inflation figures mean for me?

Economists are saying that April’s higher-than-forecast CPI may mean yet more interest-rate rises on the cards, which will pile further pain on financially stretched households.

The Bank of England has already increased rates 12 times in a row, to 4.5 per cent this month, as it battles to curb inflation.

It had been hoped that the May increase would be the last for a while, but experts said this month’s 8.7 per cent reading increases the chances of further increases.

James Smith, an economist at ING, said data “undoubtedly puts pressure on the Bank of England to hike by another 25 basis points in June”.

But, he added, “it’s not a foregone conclusion, not least because we still have another set of data before the meeting”, and pointed to the fact that jobs and wages data have been “moving in the right direction”.

When can we hope to see respite from the cost crisis?

Bank of England governor Andrew Bailey insisted in a House of Commons committee hearing with MPs on Tuesday that inflation has “turned the corner”.

But the Bank also admitted it had made some errors in its inflation forecasting, which had meant it underestimated the food-price shock.

It predicted earlier this month that inflation would fall to 5.1 per cent in the fourth quarter of 2023, which would narrowly allow the government to hit its target to halve inflation by the end of the year.

The latest inflation surprise has cast doubt over the government achieving that goal, although Mr Hunt said the target was “still absolutely deliverable”.

How can the government be so sure it will hit its inflation target?

Energy prices are expected to fall sharply from July, with Ofgem expected to confirm on Thursday the new price cap level when the current energy price guarantee limiting bills to £2,500 a year comes to an end.

Consultancy company Cornwall Insight predicts that households can expect their annual bill to fall by between £446 ($550) and £2,054 a year, based on falling wholesale energy prices.

But if food prices fail to begin to fall soon and with prices still rising across the board on everything from rent to council tax, water and broadband bills, that inflation target could yet prove elusive.