News & Analysis

Whilst April’s flash PMI report read awfully like a soft landing scenario was evolving in the UK, we think risks of inflation persistence remain prominent.

Looking first at the headline readings, the composite print for April landed at 54.0, a jump up from the 52.8 reading seen in March. Not only does this mark a further acceleration in UK growth from the stable recovery in Q1, but it also reflects a significant improvement in the UK’s consumption outlook as the entirety of the acceleration was driven by services output, which rose from 53.1 to 54.9. The upswing in activity prompted firms to once again add to their workforce. The rate of job creation picked up to its fastest pace in nine months, with overall employment growth once again hampered by a shortage of suitable candidates. This has once again pushed up wage bills for services providers, which alongside April’s rise in the National Living Wage, drove input price inflation to increase at its fastest pace since last July.

That said, with no indication that these are translating into rising output costs as of yet, today’s report reads like a soft landing in the UK.

Nevertheless, we don’t think it is all positive. We have warned that April’s rise in the National living wage could see a notable impact on wage costs and output charges for private sector firms. Indeed, this was perhaps the most notable takeaway from today’s report, with services firms in particular highlighting both a direct and an indirect impact, contributing to a sharp rise in input price inflation. While competitive pressures are currently seeing firms choose to absorb higher wage costs rather than pass these on to consumers, we think this could prove temporary. Healthy growth in new business volumes and buoyant business activity expectations both point towards a continued rebound in UK growth, which if realised should allow firms the backdrop to continually pass on these higher wage costs to the end consumer. This keeps risks to the inflation outlook tilted to the upside for the MPC, at least for the time being, despite recent suggestions to the contrary from MPC speakers.

Given the BoE’s revealed sensitivity to prior PMI releases, we think this should in turn rule out the prospect of a rate cut from the BoE next month, which markets currently assign a 17% chance.

It should also steer against a rate cut in June too, with the risks of delayed passthrough only likely to be visible in official data following the June policy meeting. That said, this is yet to be reflected in market pricing, with expectations for BoE easing remaining broadly unmoved on today’s figures. Even so, we retain our call for an August start to rate cuts, and look towards Huw Pill’s speech later today for confirmation that this view is shared by at least some of the MPC.




Nick Rees, FX Market Analyst


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