Inflation dropped to 2.8 per cent in the year to April, according to the latest figures from the Office for National Statistics (ONS), as Chancellor Rachel Reeves' Budget policies helped contain an expected surge in price growth. This marks a decline from the 3.3 per cent recorded in March and came in below City forecasts.
Core and Services Inflation
Core inflation, which excludes volatile items like food and energy, stood at 2.5 per cent. The services inflation rate, a key indicator of underlying price pressures, was 3.2 per cent, potentially easing concerns among Bank of England policymakers.
Impact of the Iran War
The recent inflation readings have exceeded initial expectations due to the Iran war, which has disrupted shipping through the Strait of Hormuz, triggering an energy price shock and threatening supply shortages. Despite this, Reeves' Budget policies have helped mitigate the impact.
Expert Analysis
Yael Selfin, chief economist at KPMG, noted that food costs are expected to rise, with raw material prices increasing by 7.7 per cent over the year. "Firms are likely to seek to protect margins by passing on some of these higher costs to consumers," she said. "However, weak domestic demand is likely to limit firms' ability to pass on higher input costs in full, reducing the risk of a broader pickup in inflation."
Future Outlook
Economists predict inflation will hover around 3 per cent until July. However, the Bank of England has warned that in a worst-case scenario where the US and Iran fail to reopen the Strait, inflation could surpass 6 per cent within months. Second-round effects, such as robust wage growth and escalating prices, could further fuel inflation.
Government Response
Chancellor Rachel Reeves stated: "The war in Iran is not our war but one we will need to respond to, and the decisions I took in the Budget last year have kept inflation down as we deal with global instability. We have the right economic plan, and to change course now would risk our economic stability and leave working people worse off."
Key Budget measures included removing the renewable obligation subsidy from household energy bills and transferring it to general taxation, resulting in a £117 reduction on Ofgem's energy price cap for April. Reeves also financed a freeze on train fares and prescription charges to tackle the cost of living.
Shadow chancellor Sir Mel Stride said: "Any fall in inflation is welcome, but prices are still rising far too fast and Labour have left our economy weak and exposed to the impacts of the Iran war. The recent spike in borrowing costs shows markets are increasingly worried about Labour's leadership chaos and economic mismanagement, leaving families to pick up the bill for a £300 Burnham Penalty."
Energy Support Package
Reeves is expected to set out a full energy support package, including scrapping a planned fuel duty rise in September. Reports also emerged that she is seeking to broker a deal with supermarkets to cap prices on essential food items in return for a suspension of packaging and health regulations. This proposal has faced backlash from City economists and a retail boss warned it could damage businesses.
