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U.K. inflation eased to 2.8% in April, preliminary data from the Office for National Statistics (ONS) showed on Wednesday.
Economists polled by Reuters had expected the inflation rate to drop back to 3%, cooling from 3.3% in March, largely due to an energy price cap introduced by the U.K.’s energy regulator Ofgem on April 1.
Consumer prices are expected to continue to increase, however, as higher energy costs due to the Iran war continue to materialize.
“There was a notable fall in annual inflation led by lower electricity and gas prices. This was due to the Government’s energy bill support package reducing variable and fixed tariffs, along with lower global wholesale energy prices before the conflict in the Middle East, which fed through to the reduction in the Ofgem cар,” Grant Fitzner, chief economist at the ONS, commented on X on Wednesday.
Smaller rises in water and sewage bills and road tax than were seen last year also helped pull the rate down, Fitzner said. Food prices, particularly for chocolate and meat products, and the price of package holidays drove inflation down further.
“These were only partially offset by a further increase in petrol and diesel prices, and an uptick in the cost of clothing and footwear,” he said.
The government has come under pressure for not doing more to mitigate higher energy costs in the U.K., a net energy importer, and for not fully exploiting remaining oil and gas reserves in the North Sea.
Chancellor Rachel Reeves is expected to announce sweeping reforms to give parliament authority to approve critical energy schemes, the U.K.’s Treasury said early Wednesday, Reuters reported.
BOE in focus
The Bank of England is keeping a close eye on price rises, as well as so-called “second round” effects, such as workers demanding higher wages and businesses raising costs for consumers, and has said it is ready to use monetary policy to combat inflation, if necessary.
Market pricing on Wednesday suggests a majority of investors expect the BOE to hike rates by 25 basis points at its July meeting, taking “Bank Rate” to 4%.
The central bank is wary of the dampening effect that increasing interest rates could have on an already-fragile economy, however, amid lackluster growth and signs of weakness in the labor market; U.K. employment data on Tuesday showed the unemployment rate had risen to 5% in the three months to March, up from 4.9% in February.
Commuters cycles past the Bank of England (BOE), left, in the City of London, UK, on Monday, Sept. 16, 2024. The central bank’s Monetary Policy Committee’s interest rate decision is scheduled for release on Sept. 19.
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As the BOE seeks to balance competing needs and risks facing the U.K., economists expect the central bank’s nine-member Monetary Policy Committee (MPC) could decide to hold rates at the next policy meeting on June 18 as it opts against acting too soon, either way.
“Inflation took a step back in April, but is set to leap at the end of spring,” George Brown, senior economist at Schroders, commented Wednesday.
“Higher energy prices look likely to lift inflation above 4% this year, having previously been on course to fall to around the 2% target this summer, he noted in emailed analysis.”
He added: “What matters now is whether this starts to bleed into broader price and wage setting. A softening labor market and fragile growth should limit that risk, but the Bank of England can ill afford to be complacent after years of successive global supply shocks.”
Brown expects the BOE to remain hawkish in its rhetoric, but to ultimately stop short of hiking rates this year.
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