Investment Institute
Market Alerts

UK reaction: Inflation comes in above expectations, but June cut still on the cards

  • 17 April 2024 (3 min read)
CPI inflation fell to an above consensus 3.2% year on year in March, from 3.4% in February - a two year low, driven largely by food, clothing and footwear.
Core CPI eased to 4.2% from 4.5% in February - again above the consensus expectation of 4.1%
Goods CPI inflation fell to 0.8% from 1.1% but services inflation remains sticky, edging down to just 6.0%, from 6.1%
In our view, March’s data alone won’t tip the scales away from a June cut; CPI inflation still fell and will likely come back in line with the 2% target in April due to the adjustment in Ofgem’s price cap

March’s smaller-than-expected fall in consumer price inflation (CPI) will be a concern for the Bank of England’s Monetary Policy Committee (MPC) but we don’t think it will be enough to dissuade it from cutting interest rates in June. The headline rate slowed to 3.2% in March – its lowest rate since September 2021 – from 3.4% in February; however, forecasters and the Bank of England had expected a sharper drop to 3.1%. Core CPI inflation - which excludes food and energy - also came in above the expected 4.1%, dropping to 4.2% from 4.5% in February. Retail price inflation (RPI), meanwhile, fell to 4.3% (expected 4.2%), while the Retail Price Index excluding mortgage interest payments (RPIX) eased to 3.3%.

On the positive front, food CPI inflation continued to slow, rising by 4% on the year ‑ its slowest pace since November 2021 – knocking off 0.11 percentage points (ppt) from the headline rate. Clothing and footwear inflation also fell back, mainly due to smaller-than-usual price increases as new season stock entered the shops; it shaved off 0.06ppt from the headline. Core goods inflation also dropped back further, falling to 1.5% from 1.9%. These downward contributions, however, were partially offset by a rise in motor fuel which increased to -3.7%, from -6.5% in February; this upward trend likely will continue if oil prices continue to rally. Services inflation was also stickier than many had anticipated, ticking down to just 6.0% from 6.1%, due to stronger housing services and communication CPI inflation - both the MPC and forecasters had expected a fall to 5.8%.

This data will make the MPC nervous, particularly given CPI’s recent stubbornness in the US. But we doubt this alone is enough to tip the scales away from a June cut. Indeed, we still expect the headline rate to broadly return to the 2% target in April, as the adjustment in energy regulator Ofgem’s price cap causes energy to knock off around 0.5ppt in addition to further slowdowns in food CPI and core goods inflation. The headline rate will admittedly rise above the target in the latter part of the year, posting readings between 2% and 2.5%, as the downward contribution from energy eases and services inflation remains sticky. But with unemployment edging up, we think services inflation will drop to the 3% to 3.5% range that is needed to keep the headline rate sustainably at target towards the end of this year. Further ahead, we see downside risks to the Bank of England’s CPI inflation forecasts next year.

Bank of England Governor Andrew Bailey also added to previous comments yesterday, stating that he has seen “strong evidence now that the process is working its way through”, adding the “dynamics of inflation are rather different between Europe and the US”. All considered, we think a June rate cut still looks most likely with two further cuts in September and November. Nevertheless, if inflation and wage growth continue to come in above expectations over the next month or two, the first cut will likely be pushed back to August.

Market reaction was relatively muted. The pound ticked up against the dollar to $1.2440 compared to $1.2420 and edged away from its recent 5-month lows against the euro, ticking up to €1.1720, from €1.700. 


    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    © AXA Investment Managers 2024. All rights reserved

    Back to top