UK Inflation Drops Sharply in Respite from Iran Energy Shock

Shoppers on the High Street in Croydon, UK. Photographer: Jason Alden/Bloomberg Photo by Jason Alden /Bloomberg

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(Bloomberg) — UK inflation fell more than expected in April, to the lowest rate in more than a year, due to a favorable annual comparison and government efforts to cut energy bills, although price pressures are expected to rebound in the coming months.

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The Office for National Statistics said its consumer prices index rose 2.8% in the year to April, down from 3.3% the previous month. The figure was lower than forecasts of 3% by private sector economists and the Bank of England.

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Services inflation, a key sign of underlying price pressures, was 3.2%, the lowest since January 2022.

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The pound hit a fresh low for the day versus the dollar after the data was released, dropping as much as much as 0.1% to $1.3376. The BOE is expected to lift interest rates this year but the CPI numbers, following on from weak labor market data, will likely make a hike less urgent. Its next decision is on June 18.

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Fuel costs surged 23% as the US-Israeli war on Iran continued to push up prices for British drivers. However, that increase was offset by lower household bills as a policy came into effect that switches much of the cost of green energy sources on to general taxation. It was part of Chancellor of the Exchequer Rachel Reeves’ budget last autumn that sought to tackle the cost of living.

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A year earlier, Reeves’ tax hikes and steeper utility bills pushed up inflation — producing a kind comparison in April 2026. Still, this decline in CPI is set to be short-lived, with the BOE expecting inflation to accelerate for the remainder of the year as the impact of global energy disruption intensifies.

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Electricity prices fell 8.4% on the month, compared to a 2.9% rise last year. Gas prices also declined 4.4%, while liquid fuels, which include heating oil, rose.

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The ONS said that chocolate, meat and package holiday prices helped to push inflation down.

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Households face a delayed squeeze from the Iran shock due to the UK’s energy price cap, which updates on a quarterly basis. The cap, which limits what suppliers can charge a typical household, is expected to jump 13% in July when it’s next updated.

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April’s inflation figure is unlikely to provide much relief to the Labour government in which Reeves serves. Prime Minister Keir Starmer is under pressure from his own party to step down after disastrous losses at this month’s local elections. The cost of living remains a top concern for voters, many of whom are turning to insurgent parties on both the left and right of the political spectrum.

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BOE rate-setters face a difficult trade-off as the Iran price shock revives both inflation and fears of an economic slowdown. Officials voted to keep interest rates unchanged in April, but signaled they were ready to back an increase to fight the risk of a price feedback loop.