UK Inflation Surges to 3.5% in April, Disrupting Interest Rate Cut Expectations

UK inflation surged unexpectedly in April, rising to 3.5% from 2.6% in March, the largest monthly jump since 2022. The figure exceeded both economists’ forecasts of 3.3% and the Bank of England’s (BoE) projection of 3.4%, raising concerns about persistent inflationary pressure. A significant factor behind the rise was a sharp increase in airfares during the Easter holiday period, which drove up services inflation, a key measure watched closely by the BoE.

The inflation spike has cast doubt on the near-term prospects for interest rate cuts. Finance Minister Rachel Reeves expressed disappointment with the figures, acknowledging that while inflation has fallen from its double-digit highs, more work is needed to reduce it further. Market reactions were swift, with sterling gaining against the US dollar and investor expectations for an August rate cut falling from 60% to 40%.

Underlying inflationary pressures were evident in the services sector, where prices rose by 5.4% year-on-year, surpassing both forecasts and BoE expectations. The month-on-month increase in services prices alone was 2.2%—the highest in 34 years—highlighting how domestic price pressures remain elevated. Airfares, in particular, surged 27.5% from March, driven by Easter travel demand, marking the second-highest monthly jump on record.

Other contributors to April’s inflation jump included hikes in gas, electricity, water bills, and employer taxes, prompting British media to dub the month “Awful April.” The BoE anticipates inflation will climb further to 3.7% by September, though internal disagreement exists over whether the inflationary momentum could become more entrenched than currently forecast.

Despite lowering the base rate to 4.25% earlier in May, the BoE remains divided over the pace of future cuts. Chief Economist Huw Pill argued that wage pressures remain high and that the rate cut pace may have been too quick. Recent surveys also suggest employers are beginning to scale back wage increases, a sign that inflationary expectations could eventually moderate—but not quickly enough to guarantee further cuts this summer.

Source: Reuters