Inflation fall is ‘lull before the storm’ say analysts – Daily Business

UK inflation has fallen to 2.8% in the year to April, though analysts say this could be the lull before the storm caused by the Iran conflict.

The latest figure from the Office for National Statistics (ONS) is a 0.5 percentage point fall from the 3.3% recorded in the 12 months to March.

It is a steeper drop than the 3% that analysts were expecting and is attributed to the energy price cap kicking in.

On 1 April the government’s cap on how much customers can be charged for each unit of gas and electricity fell by £117 a year, or 7%, from the previous cap which applied between January to March.

However, economists believe inflation will resume an upward trajectory as petrol and diesel prices have soared since the start of the Middle East conflict.

ONS data released on Tuesday showed wage growth slowed and unemployment rose in March. The figures are likely to reduce the likelihood of the Bank of England raising interest rates at its next meeting on 18 June.

Luke Bartholomew, Deputy Chief Economist, at Aberdeen said: “We are most certainly not out of the woods in terms of the impact of the Iran conflict on inflation. Ironically, this is probably the month inflation would have been back at the 2% target were it not for the Iran war.

“Instead, headline inflation will pick-up again in coming months, especially after the next energy price cap re-set in July.

“So as inflation climbs back towards 3.5% later this year, the question of interest rate hikes will remain pressing.

“But on balance, we think the weakness of the economy, and the labour market in particular, will stay the Bank’s hand, with rates remaining on hold even as inflation pressures remain elevated.”

Susannah Streeter, chief investment strategist, Wealth Club, said: “Despite the fall in inflation in April, the UK still appears stuck in a 1970s-style economic backdrop of energy insecurity, persistent price pressures and growing political intervention in markets.

“The softer-than-expected inflation reading will come as welcome relief to policymakers and households, but concerns remain that higher energy costs and geopolitical tensions could yet feed through into prices in the months ahead.”

Danni Hewson, AJ Bell head of financial analysis, said: “With all the talk of rising prices some people might be scratching their heads that the headline inflation figure for April came in at just 2.8%, significantly down on where it landed in March.

“But this bright spot is set to be relegated to the past in the months to come. Inflation on motor fuels is already at the highest levels since September 2022 and input costs going into our factories hit 7.7% in April.

“The IMF has stated that the UK’s central bank would be advisable to hold rates steady over the course of the year, and whilst markets aren’t convinced that will be the outcome, today the expectation is that rate hikes will be slower and fewer this year than had previously been priced in.”