Bank forecast to raise rates above 5% as UK inflation falls by less than expected

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The Bank of England is expected to raise interest rates above 5% before the end of the year after the UK annual inflation rate fell by less than expected last month as food prices accelerated at the fastest pace for 45 years.

The Office for National Statistics (ONS) said annual inflation as measured by the consumer prices index fell to 8.7% in April – below double digits for the first time since August, as it continued a decline from 10.1% in March. Inflation peaked at 11.1% in October.

The sharp fall came as the record energy price increases for households a year earlier were not repeated, although this was offset by the rising cost of a weekly shop as food and non-alcoholic drink prices soared by 19% in the 12 months to April.

City economists had forecast a bigger decline to 8.2%, while the Bank of England had said earlier this month it expected inflation to fall to 8.4% in April.

The latest figure comes as economists warn that Rishi Sunak’s target to halve the rate of inflation this year will be met within a finer margin than expected.

After the announcement, financial markets moved to bet it was almost a certainty that the Bank would increase the base interest rate by a quarter-point from the current level of 4.5% when its policymakers next meet in June – with the prospect of borrowing costs reaching almost 5.4% before the end of the year.

According to the latest snapshot from the ONS, electricity and gas prices contributed about 1.4 percentage points to the fall in the annual inflation rate, as last April’s rise in the Ofgem price cap drops out of the calculation.

The ONS said this was partly offset by food prices continuing to rise at the fastest annual rate since 1977, as well as rising costs for recreation and culture, alcoholic beverages and tobacco, communication, and transport.

Grant Fitzner, the ONS chief economist, said: “Prices in general remain substantially higher than they were this time last year, with annual food price inflation near historic highs.”

Rachel Reeves, the shadow chancellor, said: “As bills keep surging, families will be worried food prices and the cost of other essentials are still increasing.

“They will be asking why this Tory government still refuses to properly tackle this cost of living crisis, and why they won’t bring in a proper windfall tax on the enormous profits of oil and gas giants.”

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Jeremy Hunt, the chancellor, said: “The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast.”

Highlighting the stubborn inflationary pressures across the economy, the latest figures showed core inflation – which strips out energy and food and is closely watched by the central bank – unexpectedly rose from 6.2% in March to 6.8% in April, the highest rate in the G7.

The ONS said the increase was driven mainly by the rising cost of telecom services, as mobile phone and broadband providers pushed through mid-contract price rises above the headline rate of inflation. Telecoms firms typically bake in inflation-busting price rises based on the retail prices index, which is higher than the CPI, plus 3.9 percentage points.

The figures come amid a growing focus on the contribution to inflation from companies pushing up prices, with trade unions accusing firms of “greedflation” – when businesses use the cover of fast rising prices to push through further increases.

Sharon Graham, the general secretary of the Unite trade union, said: “The cost of food is now reaching record highs – driven, of course, by rampant profiteering by the supermarkets in particular. Until profiteering is challenged there can be no respite from continuing inflation.”

Economists said that growth in workers’ pay was contributing to service sector inflation, as companies put up prices to accommodate higher wage bills. However, wage growth remains below the headline rate of inflation. Kathryn Keane, an economist at the ONS, said: “Although, yes, when wages increase that is an increased input cost [for companies]. [But] if it’s below other increase in inputs it’s unlikely to be the primary driver.”