Britain’s inflation rate has experienced a notable decline, though experts are cautioning that this positive shift may only be a temporary lull.
Some experts are describing it as the “calm before the storm” as the ongoing conflict involving Iran threatens to escalate costs for households and businesses.
The Office for National Statistics (ONS) reported that the Consumer Prices Index (CPI) inflation fell to 2.8 per cent in April, a significant drop from 3.3 per cent in March. This marks the lowest inflation level recorded in over a year.
Despite the decrease being more substantial than anticipated, economists largely agree that this downward trend offers only a brief respite.
They predict that the escalating situation in the Middle East could soon reverse this progress, causing inflation to spike upwards once more.
The immediate outlook for household finances remains precarious amidst these global pressures.
What is inflation?
Inflation describes the rising cost of goods and services, with the inflation rate measuring the speed at which these prices increase.
For instance, April’s inflation rate of 2.8 per cent signifies that an item priced at £100 a year ago would now command £102.80.
While prices continue their upward trajectory, a recent dip in the Consumer Price Index (CPI) suggests this ascent is occurring at a decelerated pace compared to the previous month.
Why did inflation fall?
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April’s inflation drop was the largest for over 18 months and came as a fall in energy prices offset soaring fuel costs caused by the Iran war.
A big driver of the slowdown came from Ofgem lowering its energy price cap from the start of April by 7 per cent, or £10 a month, for the average household using both electricity and gas – which was pushed down by Government measures to reduce bills.
This included moving 75 per cent of the cost of the UK’s renewables obligation from household bills on to general taxation, and scrapping the energy company obligation scheme.
This helped counter fuel prices, which raced even higher in April after the Iran war sent global oil prices jumping above 100 US dollars a barrel.
The ONS said average petrol prices were 16.6p higher last month to 156.8p a litre – which was the highest since November 2022.
Diesel rocketed by 31.3p to 190p a litre last month, which was also the highest since 2022 in the aftermath of the Ukraine war.
Will lower inflation last?
Experts have warned that inflation will rise as the Iran war – and the blockade of the crucial Strait of Hormuz shipping route – continues to push up wholesale oil and gas prices, with the energy price cap set to increase significantly from July.
The latest predictions from analysts at Cornwall Insight suggest the price cap could be increased by 13 per cent, or £209, to £1,850 a year from July 1 for a typical dual fuel household.
There are also concerns that higher fuel and energy prices will soon start to feed through to food costs and the price of other goods, as manufacturers, suppliers and retailers pass these on to consumers.
How high could inflation go?
The Bank of England last month forecast inflation could rise as high as 6.2 per cent in a worst-case scenario if the Iran war is not resolved.
In its most benign predictions, the Bank said inflation would peak at 3.6 per cent by the end of this year.
Economists at ING are forecasting that inflation will reach just under 4 per cent later in 2026.
What does all this mean for interest rates?
The Bank of England has signalled that it may need to hike interest rates above 3.75 per cent currently to control inflation.
But the weaker April CPI data, combined with official figures on Tuesday showing weaker wage growth and a cooling jobs market, could see the Bank hold off from raising rates.
The International Monetary Fund said on Monday it believed UK rates could be held throughout 2026 and still see inflation come back to the 2 per cent target by the end of 2027.
What is the Government doing to help?
Chancellor Rachel Reeves is expected to outline a package of cost-of-living support on Thursday.
This will reportedly see her scrap a planned increase in fuel duty from September, alongside possible targeted energy cost measures.
