Inflation falls to 2.8%, but is expected to rise from here

The recent decline in the UK's inflation rate can be attributed primarily to reduced gas and electricity bills, yet further increases in inflation are anticipated as the ongoing conflict in Iran continues to exert significant upward pressure on prices.

In April, the inflation rate dropped to 2.8%, a decrease from 3.3% in March, reflecting a slower pace of price increases for the year.

According to the Office for National Statistics (ONS), the decline in energy prices was supported by government interventions, such as the energy bill support package and lower wholesale energy costs prior to the outbreak of the conflict.

Nevertheless, analysts project that inflation will rebound, potentially reaching around 4% by the end of this year, driven largely by the continued instability in the Middle East that affects global prices.

It is essential to clarify that a lower inflation rate does not necessarily imply a decrease in prices. Rather, it indicates that price increases are occurring at a slower rate compared to previous periods.

The decrease in overall inflation has occurred in the context of rising fuel prices, largely associated with the Iran conflict. As reported by the ONS, the average petrol price stood at 156.8 pence per litre last month, marking the highest level since November 2022. Furthermore, diesel prices increased by more than 30 pence in April, with the average price reaching 190 pence per litre, the highest average since July 2022.

Recent data from the RAC indicates that petrol prices have surged to 158.52 pence per litre as of Tuesday, marking a new high for May.

Yael Selfin, Chief Economist at KPMG, commented that the current inflation rate of 2.8% is "likely as low as it gets for some time," predicting a trend of increasing inflation throughout much of 2026, guided by the expectation of reaching approximately 4% by year-end.

In anticipation of forthcoming rises in energy prices due to the ongoing conflict, Chancellor Rachel Reeves is expected to announce additional cost-of-living assistance for households. Reeves noted on Wednesday that previous budgetary decisions had "kept inflation down as we deal with global instability."

She highlighted initiatives already implemented, including a £117 reduction on energy bills, the freezing of rail fares, and the lifting of the two-child limit, stating that she would outline the next phase of support for UK households.

Concerns from Shadow Chancellor Mel Stride were voiced, acknowledging that while any decrease in inflation is welcome, prices remain too high too quickly and criticized Labour for leaving the economy vulnerable to the repercussions of the Iran conflict.

Investment strategist Lindsay James from Quilter pointed out that the 7% reduction in the energy price cap in April is a positive development for consumers; however, he cautioned against complacency, suggesting that the benefits may be "short-lived." He emphasized the significant rise in fuel prices, indicating ongoing risks for both consumers and businesses, and advised that the UK should prepare for escalating inflation.

Grant Fitzner, chief economist at ONS, indicated that rising costs of raw materials and goods exiting factories continue to contribute to inflation, driven by increased oil and petrol prices. Producer input prices, which encompass materials and fuel costs incurred by producers, rose by 7.7% over the year to April.

Fitzner also noted that decreases in water and sewage expenses, along with vehicle taxes compared to the previous year, have aided in the reduction of overall inflation. Furthermore, the rate of increase in food prices, particularly for chocolate and meat products, has decelerated, adding additional pressure on inflation.

For the year ending in April, inflation in food and alcoholic beverages decreased to 3%, a drop from 3.7% in March. This reduction is occurring as supermarkets receive guidance from the government to contain food prices in exchange for regulatory relief.

Mixed signals for Bank of England

The Bank of England's objective remains to maintain an inflation rate of 2%. To achieve this, it can adjust interest rates, influencing the spending behaviors of households and businesses.

Typically, when inflation exceeds its target, interest rates are raised to encourage reduced spending, thereby alleviating demand for goods and services and restraining price increases.

However, much of the current inflationary pressure arises from external factors, particularly higher oil prices resulting from the Iran conflict, which diminishes the effectiveness of increased interest rates in controlling inflation.

The Bank's rate-setting committee must also consider the overall health of the economy. Recent data released on Tuesday indicates ongoing weakening in the job market, with the unemployment rate climbing to 5%.

KPMG’s Selfin expressed skepticism regarding an imminent increase in interest rates, suggesting that the committee is "likely to wait for clearer evidence of a renewed pickup in domestic inflation."