Key Takeaways
- UK inflation eased further than expected in April, down to 2.8% from March’s 3.3%.
- The fall was driven by the energy price cap, which was lowered by 7% at the start of April.
- Experts warn inflation is likely to surge at the cap’s next reset in July, which will take into account higher energy prices resulting from the Iran war.
A sharp drop in UK inflation has reduced the chances of interest rate hikes in the coming months, experts say.
Data released by the Office for National Statistics showed UK inflation fell for the first time in 2026 to 2.8% despite the economic pressures from the Iran war.
The fall from March’s 3.3% was greater than expected, with FactSet consensus predicting inflation at 3%.
This was driven by lower wholesale energy prices prior to the outbreak of the Iran war, which triggered a 7% downward adjustment in the energy price cap at the start of April. Petrol prices, which hit new highs this week, were the largest upward contributor to the Consumer Prices Index, according to the ONS.
However, experts warn the inflation slowdown in April is likely to be an outlier. The energy price cap was set prior to the outbreak of the Iran war at the end of February, and energy bills are set to rise when the cap next resets in July.
“Higher energy prices look likely to lift inflation above 4% this year, having previously been on course to fall to around the 2% target this summer,” says George Brown, senior economist at Schroders.
Has April’s Inflation Data Taken Rate Hikes Off the Table?
Prior to the inflation data release, futures markets suggested the Bank of England is likely to raise interest rates in the coming months, with the July 30 monetary policy committee meeting the most likely occasion. The implied chance of a hike at the next meeting fell following Wednesday’s ONS release, to 14% from 32%.
The July meeting is still seen as the most likely point for an increase to the borrowing rate, although the likelihood is now just above 50%.
The government and the Bank of England will still be concerned over underlying pressures on the economy. Reports surfaced this week that the government has urged supermarkets to limit price rises on essential goods, while a Cornwall Insight report suggested the energy price cap will rise 13% at the start of July.
“What matters now is whether this starts to bleed into broader price and wage setting,” says Schroders’ Brown. “A softening labor market and fragile growth should limit that risk, but the Bank of England can ill afford to be complacent after years of successive global supply shocks,” Brown says.
“This should keep the Bank sounding hawkish, but we think it will ultimately stop short of hiking rates.”
Tuesday’s jobs data saw UK unemployment unexpectedly rise to 5%. Quilter investment strategist Lindsay James says while the “painful” labor stats were unwelcome for the UK economy, it may help to limit the number of rate rises that will be needed to anchor long-term inflation expectations as it dampens the pace of wage growth.
“That said, even if interest rate rises are not delivered, the recent spike in government bond yields, factoring in not only the risk of higher prices but also political risks, is already pushing up borrowing costs for many,” James adds. “The squeeze on household finances looks set to continue, making any sort of growth in the second half of the year harder to come by.”
