UK inflation is anticipated to have eased in April, driven by a reduction in household energy bills that counterbalanced a sharp increase in fuel prices. However, economists caution that turbulence lies ahead as the Iran energy price shock begins to impact the cost of living.
Inflation Rate Expected to Decline
Most economists predict that the Consumer Price Index (CPI) inflation rate slowed to 3% in April, down from 3.3% in March. This would mean that while prices are still rising year-on-year, the pace of increase has moderated compared to the previous month.
A key factor behind this expected slowdown is the Ofgem energy price cap reduction implemented from the start of April. The cap was lowered by 7%, equivalent to £10 per month for the average dual-fuel household. This decrease was largely attributed to government measures, including shifting 75% of the cost of the UK's renewables obligation from household bills to general taxation and scrapping the energy company obligation scheme.
Mixed Picture for Energy Costs
Despite the overall easing, experts highlight a complex energy landscape. Motorists faced a surge in fuel prices following the onset of the US-Israel conflict with Iran. Sanjay Raja, chief UK economist at Deutsche Bank, estimates that pump prices rose by approximately 15% in April compared to March. "Looking ahead, we expect price momentum to pick back up as the Iran shock catches up with the inflation data," Raja wrote in a research note. "Indeed, dual fuel bills won't rise until the summer."
Household energy bills are forecast to increase from July when the regulator sets its next price cap. Analysts at Cornwall Insight suggest this could be 12% higher, adding £196 annually to average bills.
Broader Economic Impact
Victoria Scholar, head of investment at Interactive Investor, noted that the lower energy price cap in April will "go some way towards helping offset higher petrol, airline and other prices impacted by the elevated global oil price backdrop." Brent crude oil averaged around $120 per barrel during the month. However, she cautioned that when the Ofgem cap resets in July, UK households will face a sharp increase in energy bills. "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 anticipates that inflation will rise under several potential scenarios stemming from the energy shock. Experts stress that the economic outlook remains highly uncertain, depending on the duration of the Middle East conflict and the trajectory of oil and gas prices.
