Higher energy bills, fuel costs and food prices caused inflation to surge to 9% last month, according to the Office for National Statistics, taking it to the highest level since 1982.
This is up from 7% in the previous month and the largest contribution to the 2 percentage point jump came from energy prices. Around three-quarters of April’s rise was down to higher electricity and gas bills, as this was the first month when consumers felt the impact of the higher energy price cap.
The increased price cap, which sets the maximum price per unit that suppliers can charge their customers, means that that millions face a £700-a-year rise in energy costs.
Inflation was also pushed higher by higher fuel and food prices, which have been driven upwards by the Ukraine war. Russia was a major energy exporter while Ukraine accounts for a significant share of grain exports.
CPI 12-month inflation rate, Apr 2012 to Apr 2022
Source: Office for National Statistics
Charles Hepworth, investment director at GAM Investments, said: “UK inflation certainly sees no sign of slowing down, recording a 9% increase in April year-on-year. This is now the highest reading in over 40 years.
“CPI rising to 9% in April from 7% in March is almost exclusively down to the surge in fuel prices, as both energy price caps were lifted by the government and the global energy market ratcheted higher with Putin’s actions in Ukraine.
“Inflation has taken firm roots in the UK economy and is likely becoming entrenched, with food, drinks, hotel and restaurant prices showing sharp increases. On the producer price front, factory gate prices rose 14% in April with input prices rising at a record 18.6%. The Brexit six-year-old hangover continues.”
Ambrose Crofton, global market strategist at JP Morgan Asset Management, added that the jump in inflation highlights “the difficult balancing act” that the Bank of England has to perform over the coming months.
The Bank has lifted the base rate at the past four Monetary Policy Committee meetings. The base rate was just 0.1% in December 2021 but was taken to 1% earlier this month; the next MPC meeting is on 16 June.
Crofton argued that the Bank would ordinarily look through issues such as the near-term supply shock in energy and commodity markets when setting the base rate but the strength in the labour market means this might not be possible.
This is because there are now fewer people unemployed than there are job vacancies – for the first time since records began – and employees are capitalising on this dynamic by asking for pay rises to cope with higher living costs. Wage growth is currently running at 7%.
“The risk is that should they raise interest rates too quickly at a time when consumers are already feeling the pinch, then this could crimp demand and push the economy into recession. Doing too little, however, risks entrenching inflation expectations and driving a more persistent wage-price feedback loop,” the strategist explained.
“As a result, we think that the Bank of England will try to strike a balance as it tip toes through these difficult times for the UK economy – cautiously raising interest rates one meeting at a time, while keeping a close eye on the economic data for any signs that the labour market or wage pressures might be moderating.”
On the implications for investors, Bestinvest managing director Jason Hollands pointed out that high inflation and moves by central banks to curb it through rate hikes are the main source of market jitters at the moment.
This has caused a broad-based sell-off in recent months, with high-growth sectors such as technology and communication services bearing the brunt of the pain as investors become less willing to pay lofty valuations for future earnings.
Hollands said: “The UK equity market, which is skewed towards ‘Old Economy’ sectors like financials, energy and consumer staples that churn out dividends, has proven more resilient than most other developed markets and is only marginally in the red year to date.
“However, given the headwinds of inflation at a 40-year high and likely to rise further before peaking, the UK economy faces a difficult period ahead. It therefore may be sensible for investors to avoid excessive exposure to more domestically focused UK shares, which are more prevalent among medium-sized and smaller UK-listed companies, and instead focus on large companies with international earnings. Thankfully, the UK equity market has an abundance of international businesses, with almost three-quarters of the earnings of UK listed companies made outside of the UK.
“In times of lower growth and high inflation, sectors that have traditionally proved defensive include consumer staples, healthcare and energy. These are well represented among the largest UK-listed companies, with consumer staples representing 19% of the MSCI UK index, and healthcare and energy respectively 14% and 13%.”