UK inflation is set to have eased last month as a drop in household energy bills offset a jump in fuel prices – but experts warned of turbulence ahead as the Iran energy price shock “catches up” with the cost of living.
Most economists think the rate of Consumer Price Index (CPI) inflation slowed to 3% in April, from 3.3% in March.
This would mean that prices were still rising year-on-year, but at a slower rate than they were the month before.
A big driver of the expected slowdown is set to come from Ofgem lowering its energy price cap from the start of April by 7%, or £10 a month, for the average household using both electricity and gas.
This was largely driven by Government measures to reduce bills including moving 75% of the cost of the UK’s renewables obligation from household bills on to general taxation, and scrapping the energy company obligation scheme.
However, experts point to a mixed picture for energy costs last month with motorists hit by a surge in fuel prices following the start of US-Israel’s war with Iran.
Sanjay Raja, chief UK economist for Deutsche Bank, said he was expecting pump prices to have risen by about 15% in April from March.
“Looking ahead, we expect price momentum to pick back up as the Iran shock catches up with the inflation data,” Mr Raja wrote in a research note.
“Indeed, dual fuel bills won’t rise until the summer.”
Household energy bills are forecast to jump from July when the regulator sets its next price cap, with the latest predictions from analysts Cornwall Insight suggesting this could be 12% or £196 a year higher.
Victoria Scholar, head of investment for Interactive Investor, said April’s lower energy price cap will “go some way towards helping offset higher petrol, airline and other prices impacted by the elevated global oil price backdrop” with Brent crude oil trading at an average of around 120 US dollars a barrel during the month.
“When the Ofgem energy price cap resets in July, UK households will be faced with a sharp increase in energy bills,” she cautioned.
“Were it not for the Iran war, it would be about this time that the UK inflation rate was finally expected to fall back to the Bank of England’s 2% target.
“Instead, interest rate and inflation expectations have drastically rerated higher.”
The Bank of England kept interest rates on hold last month and is expecting inflation to increase under several of its potential scenarios for the impact of the energy shock.
Experts have stressed that the economic outlook could change depending on how long the Middle East conflict goes on, and how high oil and gas prices go.
