UK inflation dips in only temporary relief from Iran war impact
By Andy Bruce and William Schomberg
Inflation Trends and Economic Outlook
April Inflation Data and Immediate Market Reaction
May 20 (Reuters) - British inflation cooled by more than expected in April but the slowdown did little to mask a tough outlook for households, with global costs from the Iran war set to hit them harder later this year.
Consumer prices rose by an annual 2.8%, down from March's annual inflation rate of 3.3%, official data showed, helped by smaller increases in household energy and other regulated utility bills than in April 2025, and by measures to lower energy bills introduced by finance minister Rachel Reeves.
It marked the lowest reading since March 2025. Economists polled by Reuters had mostly expected inflation to soften to 3.0%.
Sterling dipped briefly against the dollar and the euro after the Office for National Statistics published its data before largely recovering. Investors reduced their bets on the Bank of England raising interest rates in the coming months.
Expert Commentary on Inflation Outlook
"Sadly, this improvement is set to be short-lived as the impact from the Middle East conflict continues to build, with motor fuel prices rising at the fastest pace since the Ukraine war," said Anna Leach, chief economist at the Institute of Directors.
The expected rise in inflation to around 4% later this year, according to economists, adds to the pressure on Prime Minister Keir Starmer who is facing challenges to his leadership from within his Labour Party.
Energy Prices and International Comparisons
Government Price Cap and G7 Inflation Rankings
Britain sets household energy bills through a quarterly government price cap, which fell in April - depressing the inflation reading even as global prices move in the opposite direction.
The country had recorded the highest annual inflation rate among the Group of Seven nations for 10 consecutive months until April, when the United States took that position.
Most major forecasters, including the International Monetary Fund, still expect Britain to end 2026 with the fastest inflation in the G7.
Motor Fuel Prices and War Impact
Recent Surge in Motor Fuel Prices
MOTOR FUEL PRICES RISE BY MOST SINCE 2022
Core and services inflation - the latter dragged lower by energy bills - also slowed by more than expected in April, although cost pressures faced by manufacturers jumped by much more than forecast in the Reuters poll.
Motor fuel prices for consumers surged in April - up 23% on the year, the biggest rise since September 2022.
Bank of England's Response to War-driven Price Shocks
Before the U.S.-Israeli war on Iran began on February 28, the Bank of England said inflation in Britain was likely to be close to its 2% target in April.
But the energy price shock from the war prompted the BoE to increase sharply its inflation forecasts which, it says, could hit 6.2% early next year under its most inflationary scenario.
Government and Policy Responses
Support Measures for Households
Reeves, responding to Wednesday's data, said she would announce on Thursday further support for households hit by the energy price shock. This could include a cancellation of a fuel duty increase which is due to come into effect in September.
The finance ministry is also pressing supermarket chains to introduce voluntary price caps on key food products in return for easing some regulations, two people with knowledge of the situation said on Tuesday.
Interest Rate Policy and Labour Market Trends
The key question for the BoE's interest-rate setters is whether the expected rise in headline inflation creates longer-term price pressures in the economy.
Several have said the weak jobs market could make it harder for workers to demand higher pay and for businesses to pass on higher costs, although business surveys show cost pressures and selling price hikes are spreading rapidly across companies.
Preliminary data from the tax office on Tuesday showed a sharp fall in people in payrolled employment and weaker pay growth. Wage settlement figures earlier on Wednesday pointed to a slowdown in pay growth, too.
Article Credits
(Writing by Andy Bruce; Editing by William Schomberg and Hugh Lawson)
