Market report: UK inflation retreats but 1970s timewarp still threatens to descend
Susannah Streeter, chief investment strategist, Wealth Club: “Despite the fall in inflation in April, the UK still appears stuck in a 1970s-style economic backdrop of energy insecurity, persistent price pressures and growing political intervention in markets. The softer-than-expected inflation reading will come as welcome relief to policymakers and households, but concerns remain that higher energy costs and geopolitical tensions could yet feed through into prices in the months ahead.
The reduction in the energy price cap in April was a key driver behind the slowdown in inflation, while food price pressures also eased. But with the Middle East crisis unresolved and energy markets remaining highly volatile, households and businesses are not out of the woods. Forecourt prices remain elevated, with motor fuels providing the biggest upward contribution to inflation, keeping the headline rate above the Bank of England’s target.
This snapshot shows the UK economy is still wrestling with the repercussions of a prolonged energy shock. There are also signs retailers are finding less room to cushion consumers from rising costs. Clothing prices remained firmer, with fewer discounts offered compared with the same period last year, indicating that businesses facing higher payroll costs, elevated business rates and lingering energy pressures are becoming less willing or able to absorb rising expenses. It’s amid this backdrop that government calls for price controls are straining an already fraught relationship with the supermarket sector. While ministers may be desperate to limit further pressure on households, price caps risk distorting markets and storing up inflationary pressures for later. Like a coiled spring, prices could rebound sharply once restrictions are eventually removed. The easing in food inflation during April also underlines how fiercely competitive the grocery sector already is, leaving little room for retailers to artificially suppress prices further.
Clearly the energy crunch has rattled the UK government, which is already reeling from political infighting prompted by a poor showing in local elections. The determination to keep a lid on prices and limit broader economic fallout is also likely to be behind the decision to loosen strict sanctions on Russian oil refined into diesel and jet fuel. The UK government clearly sees the energy crunch as the bigger foe right now and that outweighs the political optics of softening parts of the sanctions regime. This change will allow refiners in intermediary processing and exporting nations to use Russian crude before selling fuel onto international markets, where UK buyers can then import it under the temporary waiver rules.
This is set to ease pressure on airlines, which until very recently feared jet fuel shortages could disrupt summer schedules. Jet fuel prices monitored by IATA show they fell by 13.72% in the week ending May 15 compared with the previous month’s average. This action could prompt a further modest decline in the coming weeks.
Some sanctions on the transport of Russian liquefied natural gas have also been lifted. But energy markets remain highly strained given the continuing diplomatic impasse over Iran. Crude oil remains above $110 a barrel amid President Trump’s threat to resume strikes unless Tehran agrees to US peace proposals. Until the Strait of Hormuz fully reopens and regional tensions ease, energy markets are likely to remain volatile, keeping governments, businesses and consumers under sustained financial pressure.”