UK inflation set to rise
UK inflation set to rise
It’s been three months since the war in Iran began. But its full impact on UK inflation is yet to be felt.
So far, the global energy shock has primarily raised transport fuel prices in the UK. A cut in the Ofgem price cap, announced just before the conflict began in February, has meant a significant reduction in households’ energy bills in April. Regulated service prices, many of which are updated annually in April, such as water and sewerage bills, have also seen much slower rises than last year.
As a result, headline inflation has fallen from 3.3% in March to 2.8% in April.
However, as UK consumers are gradually exposed to the effects of this energy shock, inflation will rise. The Ofgem price cap sees a big uplift in July, pushing energy bills higher. With fertiliser shortages and rising input costs, we also expect food price inflation to accelerate through this year.
But the bigger risk is from second-round effects – a short-term spike in inflation stoking faster wage growth or encouraging firms to substantially raise prices. That could intensify price pressures. We saw this after the energy shock in 2022, which coincided with an overheating economy and a historically tight labour market. Strong second-round effects drove UK inflation to 11.1%, its highest level since 1981.
This episode seems likely to be different.
Despite strong growth in the first quarter, underlying momentum remains weak. With recent cost rises and already squeezed margins, businesses may have little room to absorb higher input prices. But consumer confidence and demand remain subdued. That should limit firms’ ability to push through significant price rises.
The labour market has also been softening. With job vacancies running at their lowest level in five years and corporate hiring intentions weak, this is a difficult backdrop for inflation-busting wage rises.
As a result, we expect this inflationary episode to be shorter-lived than the one in 2022. We see UK inflation peaking at just under 4% in the autumn before gradually easing to the Bank of England’s 2% target by the end of next year.
Chart of the week
US equities have been big beneficiaries of the boom in AI investment. It’s ‘Magnificent Seven’ tech stocks have seen huge gains since the winter of 2022, driving US indices to new highs. Continued enthusiasm for AI has meant that stocks have rallied despite the ongoing war in Iran and shock to global energy supplies, with the US S&P 500 and NASDAQ closing at record highs last week.
But this boom isn’t limited to the US. In fact, over the last two years, South Korea’s KOSPI equity index has outperformed the US S&P 500 by some margin. Since January 2025, the S&P 500 has risen just under 30% while the KOSPI has more than tripled in price. An investment in the KOSPI at the beginning of this year would have doubled in value by now.
This outperformance is down to Samsung and SK Hynix (Terrific Two?) – two of just three companies capable of making the memory chips used in AI data centres at scale. Their share prices have soared, alongside demand for these chips, and the two firms now account for more than half of the KOSPI’s total market capitalisation.
What we’re looking out for this week
We will continue to track geopolitical developments, as markets remain highly sensitive to news pertaining to the war in Iran. On the economics front, we will be looking out for the US jobs report on Friday, which is a key indicator of the health of the American economy.
The last two reports showed unexpectedly strong jobs growth in the US in March and April, despite a challenging economic backdrop. However, consumer confidence remains weak and real disposable incomes have been declining since February.
Economists expect slightly slower but still good payrolls growth in May. A major upside surprise would suggest relative resilience, especially if job creation spread out from the handful of sectors it was concentrated in recently. A significantly weaker reading would add to concerns over consumer demand amidst rising energy prices and inflation, and weak consumer confidence.
And finally…
A driver in the leafy suburbs of Hertfordshire was fined by police after being caught with a fully assembled football goal balanced atop their car; Hertfordshire Constabulary shared the footage on social media and warned members of the public against driving with an insecure load – own goal