UK inflation slows to 2.8% despite Iran war energy shock

British consumer price inflation slowed to 2.8% in April from 3.3% in March, according to official data released on Wednesday.

The reading came in lower than economists’ expectations.

Analysts polled by Reuters had largely forecast inflation to ease to 3.0%.

The anticipated slowdown was mainly linked to large increases in utility and other regulated prices in April last year, dropping out of the annual comparison.

The latest figures come at a time when policymakers are closely monitoring the impact of rising energy prices and geopolitical tensions on the British economy.

Inflation outlook shifts after Iran conflict

Before the US-Israeli war on Iran began on February 28, the Bank of England had indicated that inflation in Britain was likely to remain close to its 2% target in April.

Britain has recorded some of the highest inflation levels among Group of Seven economies over much of the past four years.

However, the recent conflict and the resulting rise in energy prices have complicated the central bank’s outlook.

The Bank of England has since sharply raised its inflation forecasts.

According to the central bank, inflation could reach as high as 6.2% early next year under its most inflationary scenario.

The renewed inflation concerns have increased pressure on policymakers and the government as households continue to face elevated living costs.

Government considers cost-of-living measures

British finance minister Rachel Reeves is expected to announce additional measures on Thursday aimed at easing the cost-of-living burden.

Among the proposals under consideration is the possible cancellation of a fuel duty increase that is scheduled to take effect in September.

The finance ministry is also reportedly pushing supermarket chains to introduce voluntary price caps on essential food items.

The measures highlight growing concerns within the government over the impact of inflation on consumers, particularly after the recent jump in energy prices linked to the conflict in Iran.

A weak labour market may limit inflation pressures

For the Bank of England’s policymakers, the main concern is whether higher headline inflation will create longer-term price pressures across the wider economy.

Several policymakers have suggested that weakness in the labour market may reduce the risk of sustained inflation.

They believe slower hiring conditions could make it more difficult for workers to demand higher wages and for companies to pass on rising costs to consumers.

Preliminary data from the tax office published on Tuesday showed a sharp decline in the number of people in payrolled employment.

The figures also pointed to weaker wage growth.

Separate wage settlement data released earlier on Wednesday also indicated a slowdown in pay growth.

The softer labour market data may offer some reassurance to policymakers worried about inflation becoming embedded in the economy.

Markets still expect rate increases

Despite the latest inflation slowdown, financial markets on Tuesday continued to price in two quarter-point interest rate increases by the Bank of England this year.

Traders also saw the possibility of a third increase.

The differing expectations underscore the uncertainty facing policymakers as they balance slowing inflation, weakening labour market conditions, and the risk of fresh price pressures from global energy markets.