UK shares edge higher as softer inflation eases rate hike concerns

UK shares traded slightly higher on Wednesday after softer-than-expected inflation data for April eased investor concerns over aggressive interest rate hikes, although some analysts warned the relief may prove temporary.

The blue-chip FTSE 100 gained 0.13% by 10:40 am GMT, while the midcap FTSE 250 rose 0.29%.

The gains came after fresh data showed consumer prices rose at an annual rate of 2.8% in April.

That compared with 3.3% in March, and was below expectations of 3.0%.

Softer inflation eases pressure on the Bank of England

The lower inflation reading prompted some analysts to question whether the Bank of England would need to continue tightening monetary policy aggressively.

The inflation figures followed labour market data released on Tuesday, which showed the unemployment rate had edged higher.

James Smith, developed markets economist for the UK at ING, said markets may be overestimating the central bank’s appetite for further tightening.

"We continue to think markets are overestimating the Bank of England's willingness to tighten policy," Smith said, as mentioned in a Reuters report.

Earlier this week, the International Monetary Fund also suggested the central bank may not need to raise interest rates further in order to bring inflation back to target levels.

Analysts warn inflation relief may not last

Despite the softer inflation print, some market observers warned that price pressures could rise again in the coming months due to higher oil prices linked to disruptions in the Strait of Hormuz.

Danni Hewson, head of financial analysis at AJ Bell, cautioned investors against assuming inflation had been fully contained.

"Some people might be scratching their heads that the headline inflation figure for April came in at just 2.8%. But this bright spot is set to be relegated to the past in the months to come," Hewson said, as cited in a Reuters report.

The comments reflected ongoing concerns that geopolitical tensions and rising energy costs could feed back into broader inflation trends later this year.

Defence and retail stocks lead gains

Aerospace and defence stocks were among the strongest performers during the session, with the sector index rising 1.6%.

Shares of defence contractor Babcock International Group climbed 3.2% after Peel Hunt upgraded the stock to “buy” from “add”.

Retail stocks also supported the market.

Shares of Marks & Spencer rose 4.2%, making it the top performer on the FTSE 100 after the retailer forecast a return to profit growth this year.

Political uncertainty remains in focus

Investors were also monitoring political developments in the UK, with uncertainty surrounding Prime Minister Keir Starmer continuing to weigh on sentiment.

The political backdrop added another layer of caution for investors already navigating uncertainty around inflation, interest rates, and global energy markets.