UK CPI surges in April

UK CPI surges in April, and M&S’s £300mn cyber attack

UK CPI surged in April and was even stronger than expectated. The headline rate jumped 1.2% on the month, the annual rate rose to 3.5%, its highest level since January 2024. The core rate jumped to 3.8% from 3.4% in March, and service price inflation also increased to 5.4%.

The significant increases in household bills were the chief drivers of price growth last month, gas and electricity bills rose compared with declines a year ago, which meant that some upside pressure was down to technicalities with the energy price cap. Although there were falling prices for motor fuels and clothing, this was not enough to see price growth surge to the highest levels in over a year.

UK looks like an outlier once again

Tax rises also pushed up inflation, with the rise in vehicle excise duty also blamed for the increase in prices, along with big increases for council tax, which pushed up the service component of CPI. The UK is now looking like an inflation outlier once again, with CPI rates above France, Germany and the average level for the EU.

Will higher inflation persist?

The question is whether higher inflation is a temporary blip or something that is more permanent? The sharp rise in service price inflation is extremely worrying since that tends to be sticky. Added to this, service prices are now above the rate expected by the BOE, who only expected service prices to rise to 5%. This suggests that price growth could stymie hopes for an August rate cut, with several MPC members now likely to vote against rate cuts in the coming months until there are signs that inflation is back under control.

The fact that service price inflation was above BOE expectations for a bounce is another sign that prices may not fall as quickly as the BOE hopes. While the increase in bills is hopefully a one off, the rest of the index could take time to moderate.

Market reaction

The market reaction has been immediate: higher bond yields and a pop higher in sterling, GBP/USD is now above $1.3450. This report is supportive of a stronger pound, as rate cut expectations get priced out by the market. There are now 1.6 rate cuts expected by the BOE for the rest of this year, and expectations of a rate cut in August are back at 50%, down from 58% on Tuesday.

The risk is that the added pressure to consumers caused by rising levels of energy bills and tax increases will erode consumption and could weigh on growth after a strong start for the UK economy in Q1. For now, the pound is higher, UK Gilts are underperforming European bonds and expectations for interest rate cuts are getting scaled back.

Middle East tensions fail to dent market trends

Middle Eastern tensions are driving price action in the commodity space this morning. Brent crude oil was higher by 1.5% and traded back above $66 per barrel at one stage on Wednesday. Israel’s threat to strike Iran is causing this uplift, but it is definitely not a panicked reaction, and the price of gold is higher by a mere $22 so far on Wednesday.

Equities are proving that they are resilient to geopolitical tensions, Asian stocks are generally higher, although the Nikkei is lower, while European futures are expected to open down a touch. Overall, risk assets have been good at absorbing challenges this week, including rising US bond yields on Monday, surging Japanese bond yields on Tuesday and now heightened geopolitical tensions. Even the rally in the oil price looks tepid, and the price of Brent is below the highs of the morning at $66.60.

The clam in the market is down to two things: the drop in volatility and strong momentum. The Vix is back at normal levels and is below the average level for the year so far, while momentum has been the biggest factor driving the S&P 500 in recent weeks. This helps stocks to bounce back from mini setbacks, and it suggests that the recovery in US stock markets remains strong.

M&S’s £300mn cyber attack

Finally, M&S reported results this morning. There was some good news: revenues were higher than expected, led by food sales. However, all eyes were on the forward guidance after the recent cyber-attack. The company said that disruption to its online sales would persist until July and the impact  of the attack on the company’s operating profit is approx. £300mn, which does not include what the company could receive from insurance, which could be to the tune of £100mn. The company reiterated its commitment to cost savings of £500mn by 2027-2028.

Overall, M&S has ‘kitchen sinked’ these results, and put all the bad news up front, which may reassure investors. The share price is down 8% in the past month; however, it has staged a recovery in recent days and is higher by 5%. YTD, the stock is lower by more than 2%. Can investors look to a recovery in sales in the second half of this year, boosted by the return of a fully operational online offering? If yes, then the stock could extend recent gains.