The UK Consumer Prices Index rose by 3.5% in the 12 months to April 2025, a significant increase on the 2.6% recorded for March this year, according to the Office for National Statistics. The increase was in line with the most recent FactSet consensus forecast, but will come as a shock to Britons getting used to falling inflation. It will also cause a dilemma for the Bank of England, which has just cut interest rates and is expecting to keep doing so for the rest of the year.
The upward move was largely the result of energy costs, which are typically increased in April by energy suppliers moving their prices to keep pace with inflation.
“The rise in the annual rate reflected large upward effects from gas and electricity, which resulted from the raising of the Ofgem energy price cap in April 2025,” the ONS said.
Ofgem had previously estimated that, for an average household paying by direct debit for dual fuel, this would equate to £1,849, a rise of £111 over the course of a year.
Prices of electricity, gas, and other fuels rose by 6.7% in the year to April 2025, the ONS said. Gas prices rose by 7.5% month on month compared with a fall of 15.8% a year ago. Electricity prices rose by 2.9% compared with a fall of 10.2% a year ago.
UK stocks initially dipped but are now flat on Tuesday’s close. Sterling followed a similar pattern, rising initially against the dollar to $1.34, before dropping back. UK gilt yields moved higher across all maturities, with the 10-year yield rising 5 basis points to 4.75%, having increased nearly 20 basis points in a month. Bond markets, which have been volatile this year, react to interest rates and inflation expectations. Gilt yields are now adjusting to the possibility that interest rates, which stand at 4.25%, may not now be cut twice this year.
Why Is UK Inflation Rising?
The ONS’ latest data shows that rising energy costs were the primary driver of rising inflation in the UK in April.
However, several other factors have contributed to this picture, including utilities costs and transport costs.
Prices of water and sewerage rose by 26.1% in the month to April 2025 compared with a rise of just 8.1% a year prior. This was the largest rise since at least February 1988, the ONS said.
Prices in the ONS’ transport data also rose by 3.3% in the 12 months to April 2025, an increase from 1.2% in the 12 months to March. On a purely monthly basis, prices rose by 3.8% in April 2025 compared with a rise of just 1.7% a year ago.
“The rise in the annual rate reflected a rise in vehicle excise duty (VED), which old and new electric cars became eligible to pay from April 2025,” it said.
“However, the main rise in VED occurred because some of the rates paid by new petrol and diesel cars doubled.”
A small downward effect from owner-occupiers’ housing costs, which rose by 6.9% in the year to April 2025, partially offset these notable rises. In the year to March, OOH costs had risen by 7.2%.
Has the Bank of England Cut Rates Too Early?
Today’s data will be uncomfortable reading for the Bank of England’s monetary policy committee, which is responsible for pushing inflation back to the government‘s 2% annual target.
It previously achieved this in May last year before rising prices took hold in the economy once more.
Today’s data also shows that UK inflation is approaching the high-water mark the BOE expects for inflation in 2025 more quickly than anticipated.
At its last quarterly monetary policy report on May 8, the BOE said it expected inflation to hit 3.7% in September, before falling back once more.
“We need to be confident that inflation will remain low and stable in a lasting way. We will decide carefully how much further and how fast we can cut interest rates,” the bank said on the day.
This could lead to questions about why the bank decided to cut rates earlier this month. Nevertheless, some commentators urge caution on the data. At least one member of the MPC has already indicated his concerns.
“This is certainly a bit worse than expected, but there was always the caveat that it could go higher in the next few months anyway,” says Michael Field, chief European market strategist at Morningstar.
“The FTSE 100 is basically flat today, so I don’t think anyone, including the BOE, is panicking. On the rate cuts, the bank has a huge amount of room to play around with, as rates are still 200 basis points higher than in continental Europe. So while it might look a little at odds to be cutting at this time, it could still be the right move.”
Market prices, based on overnight index swaps, expect two more interest-rate cuts from the Bank of England this year, in August and November.
