As the broader market focus stays on the fallout from the Middle East crisis, it is easy to expect inflation to keep running up on the back of higher energy prices. But as we look to the UK CPI report later, the expectation is for price pressures to ease in April. That at least on an annual basis. So, what’s the deal here?
Let’s take a quick look as to why that is and what can we expect.
The headline numbers are still very much expected to be impacted by higher energy prices from the US-Iran conflict. That should lead to monthly inflation jumping by around 0.9%. However, the annual estimate is expected to ease to 3.0% (from 3.3% previously) due to a couple of adjustments and base effects.
In particular, services inflation is the one that will be the most impacted.
Firstly, there was the data error by the Department of Transport in overstating the inflation numbers for April 2025. As noted by the ONS: “The incorrect data overstate the number of vehicles subject to Vehicle Excise Duty (VED) rates applicable in the first year of registration.”
The error led to a raised CPI estimate of around 0.12%, which was not corrected for after. However, the impact on services inflation is roughly double that when you account for the more detailed breakdown.
Secondly, there was the big jump in water and sewage prices in April 2025 due to an industry-wide infrastructure upgrade. The hike was frontloaded as part of a 5-year investment plan and averaged around £123 or roughly 26%. So far this year, the same category is only suggesting a 5% price increase. So taking that into account, it could lead to another 0.2% drop in headline annual inflation.
Thirdly, MNI points out that there will also be an offsetting drop in electricity and
gas prices amid “policy costs” being removed from bills during the autumn budget.
“This is the case for both the 60% of
consumers on price cap tariffs and the majority of the 40%
of consumers on fixed price tariffs (although there were
some policy costs that didn’t need to be paid by smaller
suppliers so the reduction for these will be less). The BOE is
forecasting a -0.34% change in contribution from this alone.”
And lastly, there will also be other base effects to account for amid stronger airfares and social rents in April 2025. So, those will also reflect a decline when weighed up against April this year.
In terms of core prices, the annual estimate is expected at 2.6% – marking a drop from 3.1% in March. That will largely be tied to easing in services inflation on the caveats pointed out above
