Household finances under renewed pressure as UK inflation jumps

UK CPI rose to an annual 3.5% in April from 2.6% in March thanks to a wave of household bill increases. It marks the largest year-on-year increase in prices since January 2024 – by Rob Morgan

An ‘awful April’ created a perfect storm for price rises. Inflation was driven by higher energy, water and council tax bills, as well as increased contract charges from the start of the new financial year. Furthermore, the hike in National Insurance and minimum wages kicked in for employers, with many companies choosing to pass extra costs onto customers.

What does it mean for interest rates?

The current acceleration in inflation was anticipated and is expected to subside after peaking in the summer. However, the bump in services inflation to 5.4% will be a huge talking point for the Bank of England’s MPC. Policymakers will be keen to monitor whether additional employment costs might lead to wider and more sustained price rises across the economy.

The element of doubt on services inflation is more than enough to kill off any hopes of a further June interest rate cut, which was already looking a remote possibility. Following on from better-than-expected economic growth, sticky core and services inflation could mean there are only one or two more quarter-point interest rate cuts to come this year. The BoE is weighing up an array of plausible inflationary scenarios, something reflected by the three-way split on the voting committee last time around.

What does it mean for households?

Household finances are now under renewed strain. Although average wages have been trending higher, mounting expenditure on bills and groceries, plus higher mortgage costs for many, means extra income is typically spent on essentials rather than saved.

Hopefully, better news lies ahead. A raft of trade agreements stands to relieve cost pressures that might have built from US tariffs, plus favourable moves in the oil price and the strengthening pound could help keep a lid on further price rises.

Meanwhile, although services inflation stands to remain elevated in the short term thanks to increased employer costs, it could be a ‘one off’ factor that simply fades away. If the Bank of England is correct and the pace of inflation slows down it could bring some breathing space. Not only would increases in bills and staples slow down, but the Bank would be afforded more room to deliver a couple more interest rate cuts that stands to provide relief for borrowers and help bolster businesses.

Unfortunately, slowing inflation is likely to coincide with a slowing economy, which poses a different set of risks. There are signs the jobs market is under pressure with vacancies falling for some time and unemployment ticking up. It is therefore doubtful wages can continue to rise so much to help with household budgeting. Plus, there could be more difficulty for those struggling to find work.