The UK's annual inflation rate dropped more than expected in April, driven by lower household gas and electricity bills after the UK's Office of Gas and Electricity Markets lowered its energy price cap.
Consumer prices rose 2.8% year over year in April, down from 3.3% a month before, according to data from the Office for National Statistics released Wednesday. The latest figure was below the consensus estimate of 3%.
"There was a notable fall in annual inflation led by lower electricity and gas prices. This was due to the government's energy bill support package reducing variable and fixed tariffs, along with lower global wholesale energy prices before the conflict in the Middle East, which fed through to the reduction in the Ofgem cap," ONS Chief Economist Grant Fitzner said. Electricity and gas prices fell by 8.4% and 4.4% respectively, reversing the prior year's increases of 2.9% and 7.5%.
Excluding energy, food, alcohol and tobacco, the annual inflation rate edged down to 2.5% from the prior month's 3.1%, just below the consensus estimate of 2.6% and marking the lowest core inflation reading since July 2021.
In response to the latest inflation print, the Confederation of British Industry noted that inflation was expected to moderate in April due to smaller annual price adjustments relative to last year's figures.
"However, the data does not yet fully capture the inflationary impact of developments in the Middle East. While fuel prices rose again through much of the month, higher global energy costs have yet to feed through more broadly into energy-intensive parts of the inflation basket, particularly food and household utility bills. As a result, inflation is likely to rise again in the months ahead, potentially peaking around the turn of the year," said Alpesh Paleja, deputy chief economist at the CBI, noting that amid a "very different" economic backdrop, headline inflation should remain "far below" the double-digit peaks of 2022 and 2023.
Meanwhile, ING believes the "benign" UK inflation data lowers the chances of a June rate hike from the Bank of England. "Yes, UK inflation is set to rise again later this year, having dipped below 3% in April. But the data should reassure the Bank of England that last year's food price spike hasn't triggered a wave of second-round effects across the inflation basket. Like yesterday's jobs numbers, the data questions the need for aggressive rate hikes," ING wrote.
During its April 30 meeting, the central bank held its key rate at 3.75% while flagging that energy price hikes caused by the Iran war are threatening to drive inflation higher. The Monetary Policy Committee said in the minutes of that meeting that it is closely monitoring the situation and remains prepared to intervene to ensure inflation stays on track to meet its 2% medium-term target.
