Inflation shoots up to 3.5% in April: "we could be facing a summer of prolonged and persistently higher inflation"

In just six months, Rachel Reeves has managed what many thought impossible – transforming Britain's fragile recovery into full-blown stagflation. April's catastrophic 3.5% CPI figure is the receipt for Labour's economic incompetence over the last 10 months. While Reeves lectures us about fiscal discipline, her government simultaneously hammers middle England with punitive vehicle taxes, stands idly by as water companies impose 26.1% price hikes (the highest since records began), and greenlights an Ofgem cap rise adding £111 to household bills. The Chancellor who promised to be "ruthlessly responsible" has instead been ruthlessly ideological – prioritizing virtue-signaling green levies over functioning markets while core inflation rockets to 4.5%. Most telling is Labour's utter silence on the Bank of England's policy failure – presumably because criticizing unelected technocrats doesn't fit their Brussels-friendly worldview.

The Bank of England's chief economist, Huw Pill, was right to express his concerns over the persistence of inflation and the Bank lowering rates too quickly. The UK inflation rate jumped to 3.5% year-over-year in April, well ahead of the 3.3% forecast and reaching its highest level since January 2024. Economists and the Bank of England expected inflation to rise in April, skewing higher because of fiscal-year annual price rises, chiefly in energy. Looking into the data, we see the main drivers of inflation were from housing and household services and transport, so the expected rise in energy prices makes sense. This isn't the full 'Reeves Effect' yet, though - businesses faced higher minimum wages and national insurance contributions from April, so these components are yet to feed into the data. Whilst the path to lower inflation was always going to be bumpy, we could be facing a summer of prolonged and persistently higher inflation.

On X only yesterday, Rachel Reeves posted about how Labour have seen a number of interest rate cuts now, and the timing couldn’t be more perfect for egg on the face. Currently, the 30-year gilt is priced at 5.45% while the 30-year US treasury is at 5.00%. The difference here is 45 basis points, showing the stark difference between how the market is pricing the debt. If Moody’s downgraded the US the other day, they must surely be thinking the UK is turning to junk status at this stage. This is a terrifying prospect for both the Bank of England and the Treasury. For one, we do not have the growth backdrop to level out this increase in inflation to translate into decent living standards. Second, the Bank of England has started cutting.

Any jump in inflation is unwelcome, and this latest increase is disappointing, but not exactly surprising. April is traditionally the month when annual bills land on the doorstep, and many of those have seen substantial (double digit in some cases) increases this year.

I think it's too early to tell whether this means the Bank of England will say no more interest rate cuts this year, clearly it rules out a cut in May and probably June but longer term than that I think we need to wait to see what the inflation rate is for May - i.e. is this rise the start of an upward curve or is it simply a blip.

Are people still feeling the protracted cost of living crisis? Is business in general still acting with extreme caution, wary in case there's another big bump (or these days more likely, pothole!) in the road? Are business put off recruiting staff?

The answer to all three is yes which means we are still as far from those sunny uplands as ever.