UK CPI fell to 2.8% in April, but the decline is expected to be temporary

Inflation in the UK eased to 2.8% in April, preliminary data from the Office for National Statistics (ONS) showed on Wednesday.

Economists polled by Reuters had expected inflation to return to 3%, cooling from 3.3% in March, largely because of the energy price cuts introduced by UK energy regulator Ofgem on April 1.

Consumer prices are expected to continue to rise, however, as higher energy costs due to the Iran war continue to exist.

“There was a significant fall in inflation for the year led by low prices for electricity and gas. This was due to the Government’s package to support the energy bill to reduce variable and fixed prices, as well as the low prices of wholesale energy prices worldwide before the Middle East conflict, which led to the reduction of Ofgem car,” Grant Fitzner, chief economist at X Wednesday, noted.

Smaller increases in water and sanitation bills and road tax than seen last year also helped lower the rate, Fitzner said. Food prices, especially chocolate and meat products, and the price of package holidays have reduced inflation.

“This has been slightly disrupted due to the increase in petrol and diesel and the increase in the cost of clothing and shoes,” he said.

The government has come under pressure for not doing more to reduce the UK’s high energy costs, the company’s energy imports, and not fully exploiting the remaining oil and gas reserves in the North Sea.

Chancellor Rachel Reeves is expected to announce sweeping changes to give parliament the power to approve critical energy plans, the UK Treasury said early Wednesday, Reuters reported.

The Bank of England is closely monitoring the rise in prices, and the so-called “second round” effects, such as workers seeking higher wages and businesses raising costs for consumers, and has said it is ready to use monetary policy to fight inflation, if necessary.

Market values ​​on Wednesday suggested that most investors expect the BOE to raise rates by 25 basis points at its July meeting, taking the “Bank Rate” to 4%.

The central bank is wary of the negative impact that interest rate hikes could have on an already fragile economy, however, amid a lack of growth and signs of weakness in the labor market; UK employment data on Tuesday showed the unemployment rate rose to 5% in the three months to March, up from 4.9% in February.

As the BOE seeks to balance competing demands and risks facing the UK, economists expect the central bank’s nine-member Monetary Policy Committee (MPC) to decide to hold rates at its next policy meeting on June 18 as it chooses to act quickly, either way.

“Inflation eased back in April, but will pick up at the end of spring,” said George Brown, senior economist at Schroders, on Wednesday.

“Higher electricity prices look likely to push inflation above 4% this year, as we had previously forecast it to fall below the 2% target this summer, he said in an emailed analysis.”

He added: “What matters now is whether this starts to translate into broader price and wage stagnation. A softer labor market and weaker growth should limit that risk, but the Bank of England cannot be complacent after years of successive supply shocks.”

Brown expects the BOE to remain hawkish in its rhetoric, but ultimately stop the deficit from hiking rates this year.

Josie Anderson, European economist at Nomura, told CNBC on Wednesday that the Bank of England appears comfortable waiting to see what happens before deciding whether it needs to raise its key policy rate.

“The question is, are workers going to start demanding higher wages? Does that mean service businesses that don’t have big energy costs are going to start putting their rates up? If that happens, and the Bank of England starts to see evidence of that, then that’s when they’re likely to raise rates,” he told CNBC’s “Squawk Box Europe.”