After the UK inflation rate jumped by more than expected in April, its highest level since February last year, wealth managers discuss the impact on the economy, asset allocation and potential interest rate cuts.

The latest figures from the Office for National Statistics show that UK annualised inflation came in at 3.5 per cent in April, up from the 2.6 per cent reported in March, driven by sharp rises in household bills, food, vehicle duty and airfares.

Annualised inflation was forecast to come in at 3.3 per cent. Core Inflation came in at 3.8 per cent in the 12 months to April, up from the 3.4 per cent in March and higher than forecast.

The Bank of England is expected to reject calls for faster and deeper interest rate cuts after the growth in prices proved to be stronger than financial markets expected.

Here are some reactions from wealth managers to the figures.

Nicholas Hyett, investment manager, Wealth Club
"The UK's disinflation story has gone down the drain this morning. Higher water and energy prices were always expected to push up inflation in April. In the event, prices have risen even faster than expected – with the price of household services rising a whopping 7 per cent year-on-year while water and sewerage costs alone were up 26.1 per cent month-on-month. 

“The spike could cause a bit of a stink at the Bank of England, which cut interest rates just a couple of weeks ago only to see inflation smash through the 2 per cent target. Two members of the Monetary Policy Committee (MPC) wanted to leave rates unchanged, and may well feel vindicated by the number. Higher core inflation will be particularly concerning, since this measure of domestically-generated inflation should be easier for the Bank to influence. The net effect of all this is a greater squeeze on the consumer, together with the probability of fewer interest rate cuts in the near term. Neither of those is good news for the government's growth agenda which, despite surprisingly strong GDP growth in recent months, risks getting bogged down before the structural reforms to underpin future growth are in place."

Luke Bartholomew, deputy chief economist at Aberdeen
“Inflation was always going to jump higher given movements in energy and other administered prices, but the reported increase is bigger than expected. In particular, services inflation looks especially strong, which may suggest the various cost shocks such as the increases in National Insurance and the living wage are hitting firms and starting to be passed on into final prices.

“Certainly, this will reinforce the concerns voiced by BoE chief economist Huw Pill that underlying inflation pressures are sticky, so there is less room for the Bank to cut rates. Nonetheless, we think a quarterly profile of rate cuts remains appropriate, but the chance of the easing cycle speeding up any time soon has fallen.”  

Neil Wilson, investor strategist at Saxo UK
“We should always take April's data with a pinch of salt, but higher inflation leaves the Bank of England happy to carry on at its relatively sedate pace of cutting once per quarter. This uptick in the consumer price index (CPI) has been on the cards and well discounted already. Inflation is likely to rise to 3.7 per cent by September, according to the Bank of England's own estimates. This is partly because of increases in energy prices and increases in some regulated prices such as water bills. But thereafter we expect inflation to fall back to the 2 per cent target, which will enable the BoE to cut deeper than perhaps the market currently expects. There are clearly risks around this assumption due to the sticky nature of services inflation, but generally it seems likely that inflation in the UK is on the way down. The BoE's continued caution on cutting any more quickly should offer sterling ongoing support against the broader trend of dollar weakness.”

Patrick O'Donnell, senior investment strategist, Omnis Investments
“Inflation came in stronger than expected. Consensus estimates did have a significant rise relative to last month due to the large number of price resets that only occur on an annual basis and take place in April. Energy, vehicle excise duty and water bills together boosted inflation significantly. There was some added uncertainty due to the increase in minimum/National Living wages as well as the employer NIC increase all coming into effect in April, too. Following the latest BoE meeting earlier this month, the probability of a cut in June was significantly reduced. This data should call into question whether there is a cut at the subsequent meeting in August. It’ll still be taken negatively by the bond market and there may potentially be further negative news later in the week.”

Alexandra Loydon, director of advice at St James’s Place 
“While the Bank of England’s May interest rate cut may have offered some short-term relief to consumers, today’s higher-than-expected rise in inflation to 3.5 per cent has likely brought this optimism to a halt. Although this increase was expected, driven by April’s rise in household bills, it is no less concerning for consumers who continue to grapple with mounting financial pressures.

“Our recent research reveals the extent of this strain, with a quarter of the population feeling anxious about the year ahead and six in 10 (58 per cent) reporting that they do not feel financially comfortable. Today’s figures will do little to ease this pressure, and while the Bank of England is expected to cut rates by one or two quarter points before the end of the year, the timing of these reductions is becoming increasingly uncertain. As a result, borrowers and mortgage holders are lacking any reassuring clarity.

“The situation also remains complicated for savers. Indeed, while rates on easy access accounts are starting to fall significantly, today’s inflation figure is expected to mark the start of a prolonged period of inflation above 3 per cent. It is therefore vital that savers stay alert and ensure that they are taking advantage of the most competitive savings rates available. For those saving for the longer term, investing can be a smart way to boost income further, just be sure to diversify your investments to spread risk and protect against market volatility.”