UK inflation cools but relief from Iran war set to be temporary
By Andy Bruce
Inflation Trends and Economic Outlook in the UK
Recent Inflation Data and 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 as the Iran war pushes future energy costs sharply higher.
Consumer prices rose by 2.8% in the 12 months to April, down from March's annual inflation rate of 3.3%, the Office for National Statistics said, as a big rise in energy and other regulated utility bills in April last year slowed the increase.
Economists polled by Reuters had mostly expected inflation to soften by less to 3.0%.
Sterling dipped briefly against the dollar and the euro after the data was published before largely recovering.
Core and Services Inflation
Core and services inflation also slowed by more than expected, although cost pressures faced by manufacturers jumped by more than forecast in the Reuters poll.
Motor fuel prices for consumers surged in April.
Impact of the Iran War on Energy Prices
Bank of England's Response and Forecasts
Before the U.S.-Israeli war on Iran began on February 28, the Bank of England said inflation in Britain - the highest among the Group of Seven economies for much of the last four years - 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 Measures and Support for Households
Finance minister Rachel Reeves said she would announce measures on Thursday about further support for households hit by the Iran war energy price shock. This could include a cancellation of a fuel duty increase which is due to come into effect in September.
Supermarket Price Caps
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.
Future Outlook for Inflation and Interest Rates
Bank of England's Key Considerations
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.
(Writing by Andy BruceEditing by William Schomberg)
