Inflation in the UK drops to 2.8% in April as the energy price cap eases the pressure

Inflation in the UK fell to 2.8% in April because the cost of energy went down, but prices are likely to go up again soon.

UK inflation fell more than expected in April, from 3.3% in March to 2.8%, according to preliminary data released on Wednesday by the Office for National Statistics (ONS). This was because energy prices went down and some family bills went up less than expected, which lowered price pressures.

Economists asked by Reuters had predicted a smaller drop to 3%. The bigger-than-expected drop is mostly due to Ofgem’s new energy price cap, which went into effect on April 1.

Grant Fitzner, the head economist at the ONS, said that the drop was mostly due to lower prices for gas and electricity, which were helped by government actions and earlier drops in the cost of energy around the world.

“Annual inflation dropped considerably, mostly because the prices of gas and electricity went down.” He wrote on X on Wednesday that this was because of the government’s energy bill support package, which lowered variable and fixed tariffs, and lower global wholesale energy prices before the war in the Middle East. These factors led to the Ofgem cap being lowered.

He also said that prices for water, sewage, and roads went up less than they did last year, which also slowed things down. Inflation went down because of cheaper food prices, especially for meat and chocolate. Package holiday costs also went down.

Fitzner said that the rise in gas and diesel prices only partly offset the increase in clothing and shoe costs.

Even though price pressures eased in April, economists think they will pick up again in the coming months as higher energy costs start to show. This situation is partly because of increased international tensions and the effect the Iran conflict has had on global energy markets.

There has also been more and more criticism of the government’s energy policy. For example, there have been calls for stronger steps to protect the country from unstable import prices and for more use of the North Sea’s remaining oil and gas supplies.

The UK Treasury says that in response, Chancellor Rachel Reeves will likely announce major changes that will give Parliament more power to approve important energy infrastructure projects.

The Bank of England (BoE) is now the center of attention. The BoE continues to monitor both overall inflation and the so-called “second-round effects,” including wage growth and business pricing strategies. The central bank has said that it is still ready to change monetary policy if inflation stays high.

On Wednesday, markets thought it was very likely that the Bank of England would raise interest rates by 25 basis points at their meeting in June. This would bring Bank Rate to 4%.

But officials are still wary of tightening too much because there are signs that the economy is weakening. The UK’s jobless rate rose to 5% in the three months ending in March, up from 4.9% the previous period. This data, which was released on Tuesday, added to worries that the economy is slowing down.

Economists think that the Monetary Policy Committee (MPC) might decide to keep interest rates the same at its next meeting on June 18. They may want to wait for more clear signs on inflation and growth before taking any further action.

George Brown, a senior economist at Schroders, said, “Inflation slowed down in April but is going to take off at the end of spring.”

“Higher energy prices are likely to push inflation above 4% this year. It was supposed to drop to around the 2% target this summer,” he said in an email.

Brown said that the biggest risk right now is that price pressures could start to affect pay and the overall rate of inflation.

“What’s important now is whether the situation starts to affect how prices and wages are set in general.” This risk should be limited by a weakening job market and weak growth, but the Bank of England can’t be lazy after years of repeated global supply shocks.

And he said that the BoE is likely to keep a “hawkish” tone, but it might decide not to raise rates any further this year.