On Wednesday, ING released an analysis of the latest inflation data in the United Kingdom, which showed a significant increase in services inflation largely driven by the road tax hike and the impact of the Easter holiday season.
According to ING, the inflation spike is expected to be temporary. Services inflation, which is currently at 5.4% in April, is expected to ease to around 4.5% by this summer. This forecast is in line with the Bank of England (BoE)’s projection of quarterly interest rate cuts until 2026.
The latest inflation data showed an increase from 4.7% to 5.4% in April, which is higher than ING and the BoE had initially expected. However, further analysis by ING found that most of the increase was not too worrying. It is estimated that half of the increase is due to the change in the road tax structure, which will continue to have an impact for a year before being removed from the year-on-year comparison. The BoE is expected to ignore this effect as it usually ignores tax changes.
The remaining inflation increase was due to higher airfares and holiday package costs, driven by the change in the date of Easter compared to last year. This year, data was collected just before Good Friday, resulting in a 28% monthly jump in airfares. ING expects this to ease over the coming months.
Further analysis by ING also shows that price pressures are easing in other service sectors such as restaurants, medical care and rental rates. The contribution of rental to services inflation, currently around 1 percentage point, is expected to halve by early next year due to the government’s new cap on social housing costs. The survey also shows that pricing power is weakening, reinforcing expectations that services inflation will continue to fall to 4.5% this summer and fall further by 2026.
While inflation remains above the BoE’s comfort level, ING does not expect the central bank to accelerate its monetary easing in 2023. However, the first interest rate cut is expected in August, followed by gradual quarterly rate cuts until 2026.
