Investing.com -- ING on Wednesday provided an analysis of the latest U.K. inflation data, which indicated a significant rise in services inflation, driven largely by an increase in road tax and the timing of Easter.
According to ING, this inflationary spike is expected to recede, with services inflation likely to fall back from April’s 5.4% figure to around 4.5% this summer. This forecast aligns with the Bank of England’s (BoE) trajectory for quarterly rate cuts extending into 2026.
The recent inflation data showed a jump from 4.7% to 5.4% in services inflation during April, a larger increase than anticipated by both ING and the BoE. However, ING’s analysis suggests that this rise is less concerning upon closer examination.
They estimate that half of the increase is attributable to the change in road tax, which will persist for a year before dropping from the annual comparison. The BoE is expected to overlook this change, as it typically does with tax adjustments.
The remainder of the inflation surge is largely due to higher airfares and package holiday costs, influenced by Easter’s timing. Last year, Easter occurred in March, affecting the annual rate comparison.
This year, the data was collected just before Good Friday, amplifying the monthly increase in plane ticket prices by 28%. These effects are predicted to diminish in the coming months.
Further analysis by ING highlights disinflation in several other service sectors in April, including restaurants, medical care, and rents. The contribution of rent to services inflation, currently at a full percentage point, is expected to halve by early next year due to a lower government cap on social housing costs.
Surveys also indicate a decline in pricing power, supporting ING’s expectation that services inflation will decrease to the 4.5% region this summer and continue to lower by 2026.
Despite inflation levels remaining above the BoE’s comfort zone, ING maintains that policymakers are unlikely to accelerate the easing process in 2023.
However, they anticipate a rate cut in August, with the BoE continuing its quarterly pace of rate reductions through the year and into 2026.