Let's cut right to the chase. This is not the report that BOE governor Bailey was hoping for when he said that "inflation has turned the corner" in his remarks yesterday.
Sure, headline annual inflation may have dropped but that owes much to base effects adjustment as you can see by the details below:
The largest contributor to the decline was housing and household services, which owes to a steep fall in gas and electricity prices. ONS also clarified this as they mention that the fall is largely because of the upward contribution from the higher Ofgem energy cap (in April 2022) dropping out of the annual estimates.
Meanwhile, we saw core annual inflation jump up to 6.8% - its highest since March 1992. Yikes.
That owes much to stickier services inflation in the UK with annual food price inflation continuing to hold above 19%(!) as well.
All of this just bolsters the case for more rate hikes to come but for the BOE, it's yet another data point which is proving to be a headache.
Their rate hikes so far have not done much of anything and it could still be possible that it might take longer to take effect. But as they tighten financial conditions further, that will add more strain to the economy and that is something that they have to be very careful about.
So far this year, policymakers have gotten lucky that the UK economy has been largely more resilient than anticipated. A recession may still be on the cards but it isn't so much so a certainty as we saw towards the end of last year.
But if they continue to push the agenda on rate hikes, it sets up the economy for a harder fall potentially when that downturn begins to hit.
For now, markets will start to look at the narrative that perhaps the BOE needs to do more. However, it will come down to Bailey & co. to decide if they can really afford to. And if this starts showing up as an adverse impact to the economic outlook for the UK, the pound might not get much of a boost even if rates pricing for the BOE is bumped up.