UK CPI eases to 2.8% in April, but slowdown expected to be short-lived

Preliminary data from the Office for National Statistics (ONS) on Wednesday showed that UK inflation fell to 2.8% in April.

Economists polled by Reuters had expected the inflation rate to fall to 3% from 3.3% in March, largely due to the energy price cap that Britain’s energy regulator Ofgem introduced on April 1.

However, consumer prices are expected to continue to rise due to increased energy costs due to the Iran war.

ONS chief economist Grant Fitzner said: “There has been a significant fall in annual inflation driven by lower electricity and gas prices. This was due to the Government’s energy bill support package, which reduced variable and fixed tariffs, as well as lower global wholesale energy prices ahead of the conflict in the Middle East, which led to the decline in the Ofgem current account.” commented on X on Wednesday.

Smaller increases in water and sewer bills and road tax from last year also helped bring the rate down, Fitzner said. Food prices, especially chocolate and meat products, and package holiday prices caused inflation to fall further.

“These were only partially offset by further increases in petrol and diesel prices and increases in the cost of clothing and footwear,” he said.

The government is under pressure for not doing more to reduce high energy costs in the UK, a net energy importer, and for failing to fully exploit remaining oil and gas reserves in the North Sea.

Chancellor Rachel Reeves is expected to unveil sweeping reforms that will give parliament the power to approve critical energy plans, the UK Treasury said early on Wednesday, Reuters reported.

The Bank of England is closely monitoring price rises, as well as “second-round” effects such as workers demanding higher wages and businesses raising costs for consumers, and has said it is prepared to use monetary policy to combat inflation if necessary.

Wednesday’s market pricing shows that the majority of investors expect the BOE to raise interest rates by 25 basis points at its July meeting, bringing the “Bank Rate” to 4%.

The central bank is cautious about the dampening impact rising interest rates could have on an already fragile economy, amid weak growth and signs of labor market weakness; U.K. employment data published on Tuesday showed the unemployment rate rose to 5% in the three months to March, from 4.9% in February.

As the BOE tries to balance competing needs and risks facing the UK, economists expect the central bank’s nine-member Monetary Policy Committee (MPC) may decide to keep interest rates steady at its next policy meeting on June 18, choosing not to act too soon in either case.

“Inflation took a step back in April, but will rebound in late spring,” George Brown, senior economist at Schröders, said Wednesday.

“Higher energy prices, previously on track to fall to the 2% target this summer, appear likely to push inflation above 4% this year,” the emailed analysis said. he said.

He added: “What matters now is whether this will be reflected in wider price and wage setting. A softening labor market and fragile growth should limit this risk, but the Bank of England cannot afford to remain complacent after years of global supply shocks.”

Brown expects the BOE to maintain its hawkish tone in its rhetoric, but ultimately expects interest rate increases to be insufficient this year.

Josie Anderson, European economist at Nomura, told CNBC on Wednesday that the Bank of England seems comfortable seeing what happens before deciding whether it should raise its policy rate.

“The question is: Will workers start demanding higher wages?” he told CNBC’s “Squawk Box Europe.” Will this mean that utility companies without large energy costs will start increasing their prices? “If that happens and the Bank of England starts to see evidence of that, then there will most likely be rate hikes then,” he said.