Inflation Surprise: oops, I got that wrong

April’s UK inflation data has been released this morning, and the headline number is higher than I had anticipated. April’s number is 1.2%, and the year-on-year number is 3.5%. I was expecting a number closer to 3%.

Of the 0.9% increase from March, 0.2% is the product of the 26% increase in water bills, and 0.5% is the product of a 4.5% increase in gas and electricity prices. (Last year in the same month, they fell by 12%, so there is a significant base effect here too.) Food prices were higher, as were air fares, which were 16% higher than a year earlier, in part reflecting the timing of Easter and the inevitable price increases that airlines coincide with public holidays.

Although I am a little embarrassed by this outcome, given the criticism I have directed at the MPC and OBR for getting their forecast consistently wrong, all is not lost! The higher number is in large part the result of several one-offs, not least the increase in water bills and the timing of Easter and the resulting increase in airfares. The most significant impact on the headline number is once again gas and electricity prices, but importantly, in July these prices will fall, maybe by as much as 10%. (We will know what the July price cap will be later this month on the 27th.)

Importantly, despite getting this number wrong, my view remains that this short-term spike in inflation has now peaked and that we will see inflation fall through the remainder of this year and in 2026, back down to the 2% target. This higher number we have seen today, which is broadly in line with the MPC’s forecast, should not change the trajectory of interest rate cuts either. I still expect another two cuts in August and November, taking rates to 3.75% by year-end.

I also continue to expect the UK economy to outperform gloomy consensus expectations and deliver growth of 1.5% for the year and 2% in 2026. Most significantly, I expect this higher growth to be driven by better-than-expected household consumption growth as consumers start to save less and spend more, prompted in part by lower interest rates.

After doing a bit more digging into today’s numbers, I found that a very strange price change appears to be the culprit in driving the services inflation number to a significantly higher level than was expected. Tucked away in the arcane detail is an item called Operation of Personal Transport Equipment which is up significantly. This includes things like car spare parts, fuel, servicing and repairs, but it also includes something called “other services” which includes new vehicle excise duty.

The increase is apparently the product of the government’s decision to double vehicle excise duty on new cars above £40,000. According to the ONS, this one item was up by just under 20% year on year (it had consistently increased by about 4.5% for months before this release), and this alone boosted overall services inflation by about 0.5% and CPI by 0.2%.

So, adding up the key items, 0.2% came from water charges, 0.5% from the energy price cap, and another 0.2% came from this change in vehicle excise duty.

Importantly, none of these increases were driven by the economy; all are the product of one-off, policy-driven changes. This, I think, reinforces my view that this higher-than-expected number should have no impact on interest rate policy decisions.

I still think the outcome from this excise duty change is odd. We will see if the ONS has done its maths correctly later.