After the UK inflation rate dropped by less than expected last month, investment managers discuss what this means for the economy, investments and potential interest rate rises.

The Office for National Statistics said this week that annual inflation fell to below double digits in April to 8.7 per cent, from 10.1 per cent in March, but the Bank of England had expected a bigger decline. 

The fall came as the record energy price increases for households a year earlier were not repeated, but food prices continued to soar. Core inflation also rose 6.8 per cent in the 12 months to April 2023, up from 6.2 per cent in March, which is the highest rate since March 1992.

UK Chancellor of the Exchequer Jeremy Hunt said: “The IMF said yesterday we’ve acted decisively to tackle inflation but although it is positive that it is now in single digits, food prices are still rising too fast…we must stick resolutely to the plan to get inflation down.” Consequently, another rise in interest rates from the Bank of England seems to be on the cards in June.

Here are some reactions from investment managers to the decline in the inflation rate.

Nicholas Hyett, investment analyst, Wealth Club
"As we lap the dramatic spike in energy prices following the Russian invasion of Ukraine, some decline in annualised inflation was inevitable. As a result, year-on-year price growth is now out of double figures – albeit still eye watering at 8.7 per cent and higher than economists had hoped.

"However, the devil’s in the detail. The energy shock may be fading, but month-on-month inflation is higher in April than it has been at any time since last October as communication, transport, alcohol, tobacco and food prices continue to rise. Core inflation, the kind of price rises that are created by the UK domestically, rather than forced upon the country by global energy and food prices, is at the highest it’s been in over 20 years. All this means is that it remains too early to celebrate victory in the Bank of England’s war against inflation. Today’s [24 May 2023] numbers probably strengthen the case for higher interest rates at the next MPC meeting, and that means the pain will continue for consumers and businesses alike.”

Giles Coghlan, chief market analyst, consulting for HYCM 
“Inflation has finally fallen to single figures, and while the IMF now says that the UK economy will grow by 0.4 per cent this year, it would be remiss to suggest that we are out of the woods just yet. After all, this [yesterday] morning’s CPI data still came in hotter than many analysts expected. Even though the large price rises we witnessed a year ago have now dropped out of the annual comparison, the fact that core inflation remains at 6.8 per cent shows just how entrenched it is in the economy. For the Bank of England and Governor Bailey – who indicated on Monday that we would see a much sharper drop today – this is very concerning and reveals that more work still needs to be done to bring inflation down to the BoE’s 2 per cent target. As such, the markets are pricing in two further interest rate hikes in the months to come, with a potential terminal rate of 5.2 per cent in the summer, which should instigate an uptick in demand for sterling and euro/sterling sell-off.”

Julian Jessop, economics fellow at the Institute of Economic Affairs
“Today’s disappointing numbers show how difficult it is to bring inflation back down once central banks have allowed it to run out of control. The fall in headline inflation in April, from 10.1 per cent to 8.7 per cent, is obviously welcome but entirely due to the smaller increase in domestic energy bills, which we already knew about. Other elements of inflation remain sticky, including food prices and the core measure (excluding food and energy) which jumped sharply.

"There was at least some more evidence today that pipeline cost pressures are easing, including producer price inflation in the food sector. May’s inflation data should therefore be better. But the next set of inflation figures will have to be much better to prevent interest rates from rising further.”

Daniele Antonucci, chief economist and macro strategist, Quintet Private Bank (parent of Brown Shipley)
“While UK inflation did slow more visibly this time around, it only declined to 8.7 per cent, partly driven by very strong food prices and more general price and wage pressures, once again overshooting the Bank of England’s expectation. Taken at face value, this makes our base case of extra rate rises ever more likely. With core inflation, excluding food and energy. accelerating we expect the Bank to increase its key policy rate over the next few months.

Even though the UK economy appears to have avoided the deep recessionary scenario many were predicting at the start of the year, we suspect that economic growth will stay weak or even weaken further. The interest rate, inflation and fiscal squeeze on household income and corporate profitability is likely to intensify.”

Isabel Albarran, investment officer at Close Brothers Asset Management
“As inflation slows, observers will be closely watching the labour market for signs of further weakening. Looking at recent labour data, the Bank of England has changed its assumption of how businesses will respond to weakening economic conditions, assuming more labour hoarding to maintain talent and avoid shortages. This could keep the labour market stronger for longer. While we expect wage growth to fall as inflation eases, there is also a chance that strong wage growth is more persistent, as workers look to repair their balance sheets.”

Andy Mielczarek, founder and CEO of SmartSave, a Chetwood Financial company 
“In the current climate, the majority of easy-access savings accounts will not be able to keep pace with inflation, meaning that a significant number of people are seeing their money losing value in real terms. Worse still, our research shows that a worrying percentage of the UK’s savers are relying on current accounts alone to house their money, while uptake for different savings products – from ISAs to fixed-rate bonds – is low across the board.

"Even though pressures on the economy are gradually easing, it’s vital that people in a position to put money away each month are proactive about how they are managing their savings to beat inflation. For those looking to deposit a lump sum, fixed-term, fixed-rate bonds can be a good option when it comes to accessing higher interest rates, while many people could also benefit from exploring their options beyond the savings accounts offered by high street banks.”

Jatin Ondhia, CEO, Shojin 
“For the first time in eight months, evidence that a corner has been turned appears more tangible and, following the IMF’s upgrade to the UK’s growth forecast, the emergence of a more positive tone will be welcomed by many. That being said, there is no escaping the fact that the economy still faces a long road to recovery. With inflation figures set to stay above the Bank of England’s target for longer than anticipated, it remains to be seen whether further, tighter monetary policy may be needed. There might be a sense of cautious optimism, but investors should continue to assess how well placed their portfolio is to deliver on their short-, medium- and long-term goals, with the challenges of inflation and higher interest rates unlikely to dissipate this year."

Douglas Grant, group CEO at Manx Financial Group
“While many SMEs were proactive by locking their debt into fixed rate structures, it is now too late for other businesses that have borne the brunt of spiralling costs without a financial safety net. The government should intervene to mitigate the impacts on SMEs, which are the backbone of the UK economy. According to our research, 22 per cent of UK SMEs that required external financing or capital in the past two years were unable to obtain it. Moreover, over a quarter had to temporarily suspend a business area due to inadequate funding. It is concerning that SMEs continue to face difficulties in accessing finance, which is impeding their growth potential and stalling the UK economy.

“We have been advocating for a permanent government-backed loan scheme that is sector focused and involves both traditional and non-traditional lenders to secure the future of our SMEs. As concerns mount over the future of the economy, the significance of implementing a permanent scheme cannot be overstated, it could serve as a critical factor in sustaining economic recovery and, in turn, determine the survival of numerous companies."