UK inflation fell less than expected, cutting hopes for interest rate reductions.

The Domestic foreign exchange platformUK's inflation rate fell less than expected in April, with core inflation showing almost no change. This led investors to cancel their bets on a rate cut next month, which could have boosted Prime Minister Rishi Sunak's support ahead of the general election.

According to data from the Office for National Statistics, consumer prices rose by 2.3% year-on-year last month, down sharply from 3.2% in March. This is the lowest rate since July 2021, when inflation was at 2.0%.

However, economists surveyed by both the Bank of England (BoE) and Reuters had previously expected the inflation rate to drop to 2.1%.

As a key metric for domestic price pressures measured by the BoE, service sector inflation was higher than expected, while gasoline prices also increased.

Following the data release, the pound jumped, and investors reduced the probability of a rate cut by the Bank of England in June from 50% on Tuesday to 18%.

Economists had expected a more significant drop in inflation due to the 12% cut in household energy prices that took effect last month.

Luke Bartholomew, Senior Economist at asset management company abrdn, stated, "While inflation continues to fall significantly, this report will disappoint both the Bank of England and investors hoping for a rate cut in June. In particular, the strong performance of core and service sector inflation makes it harder for the BoE to believe that underlying inflationary pressures have sufficiently cooled."

The service sector inflation rate slightly decreased from 6.0% in March to 5.9%. Both the BoE's forecast and the Reuters survey had expected this figure to be 5.5%.

Core inflation, which includes goods but excludes energy, food, and tobacco, also reflected persistent price pressures, falling only to an annual rate of 3.9% from 4.2% in March. The Reuters survey had expected this figure to be 3.6%.

Price Pressures

Recent labor market data conveyed mixed signals regarding price pressures, with private sector wage growth (excluding bonuses) only slightly easing in the three months up to March.

The Bank of England is concerned that rapid wage growth, a significant component of service sector inflation, may keep inflation high throughout the economy.

Sunak has struggled to regain voter support for his Conservative Party and has tried to credit the reduction in inflation to his efforts.

In a statement, he said, "Today marks an important moment for the economy; inflation is returning to normal levels."

Wednesday's data indicate that the UK's inflation rate is lower than that of the US, Canada, France, and Germany. Japan has yet to release its April inflation data. Italy's inflation rate stands at 0.9%.

Nonetheless, since 2020, the UK has performed poorly among Western European countries in terms of inflation, with consumer prices rising over 22% cumulatively. Only the Netherlands, Austria, and Germany have performed as poorly.

Another set of data from the Office for National Statistics on Wednesday dealt a further blow to Sunak and Chancellor Jeremy Hunt, showing that public borrowing in April was higher than expected, raising questions about their ability to deliver tax cuts to voters before the election.

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