Bank of England, U.K. seen in this photograph. (Photographer: Jason Alden/Bloomberg)

U.K. Inflation Rate at 13-Month Low Adds to BOE's Policy Puzzle

(Bloomberg) -- U.K. inflation slowed to a 13-month low in April, approaching the Bank of England’s 2 percent target faster than economists had anticipated.

The rate of price growth fell to 2.4 percent from 2.5 percent in March, defying analysts’ predictions for no change. That sent the pound to the lowest level this year on Wednesday, and a market gauge of the likelihood of an August interest-rate hike slid to about 41 percent, from 47 percent on Tuesday.

U.K. Inflation Rate at 13-Month Low Adds to BOE's Policy Puzzle

BOE policy makers refrained from raising interest rates this month following a snow-blighted first quarter, but they remain concerned a lack of spare capacity may be starting to fuel domestically generated price pressures. Still, with the headline rate having dropped from 3.1 percent in November, the report complicates the case for an immediate rate rise, according to Fidelity International.

The BOE “has struggled to read the direction of price changes recently,” said Ed Monk, the firm’s associate director for personal investing. “Inflation surprised to the upside at the end of last year, but the bank has overestimated inflation since then. With inflation trending lower, it only makes it harder for the Bank of England to raise rates.”

The reading for April is in line with BOE officials’ predictions for the second quarter as a whole. They see a further drop to 2.2 percent by year end, before the measure falls to the 2 percent target in two years, partly because the pass-through of the pound’s depreciation since the Brexit vote is happening faster.

The pound fell after the ONS report, dropping 0.6 percent to $1.3352. It earlier touched $1.3349, the lowest level since December.

Slower inflation is good news for consumers, who are emerging from a year of falling real incomes. Downward pressure in April came from air fares, which fell 0.2 percent over the month compared with an 18.6 percent surge a year earlier, when prices were boosted by the Easter vacation. The Easter holiday was in March this year.

Upward pressure came from auto fuel, with rising crude prices increasing the cost of filling up the tank by 1.2 percent. Core inflation, which excludes energy, food, alcohol and tobacco costs, eased to 2.1 percent last month, the ONS said.

Soft drink prices saw their biggest ever increase for the time of year -- up 2.8 percent from March -- following the introduction of a tax on sodas with a high sugar content. However, the impact on inflation was limited, and many retailers haven’t yet passed on the levy to consumers, the ONS said.

Imported inflation has eased sharply over the past year as the effect of sterling’s 2016 depreciation dissipates but domestic pressures appear to be building, with the latest data showing that communications, hotels, restaurants and cultural activities exerted an upward influence on prices last month.

U.K. Inflation Rate at 13-Month Low Adds to BOE's Policy Puzzle

House prices in March rose 4.2 percent from a year earlier, the same as in February. The worst-performing region was London, where values fell 0.7 percent, the biggest drop since September 2009 when Britain was in the grip of the financial crisis.

©2018 Bloomberg L.P.