UK Inflation Drops to 2.8% but Iran War Risks Further Price Rises

Prices in the UK rose by 2.8% in the year to April, down from 3.3% in March, remaining above the Bank of England’s 2% target.

However, UK inflation is expected to rise in coming months due to the ongoing impact of the US-Israel war with Iran, which has increased global energy and fuel costs.

The Bank of England adjusts interest rates to control inflation. Six cuts since August 2024 brought rates to 3.75%, but the war likely will delay further reductions and could prompt a rate increase.

Inflation measures the increase in prices over time.

For example, a bottle of milk costing £1 one year and £1.05 the next represents 5% annual milk inflation.

The Office for National Statistics (ONS) tracks prices of hundreds of everyday items, including food and fuel.

This virtual “basket of goods” is regularly updated to reflect shopping trends, with additions such as alcohol-free beer, dashboard cameras, and pet grooming equipment in 2026, while premium bottled lager, certain wines, and wrapping paper were removed.

The ONS calculates inflation based on price changes in the basket over the previous 12 months.

The main inflation measure is the Consumer Prices Index (CPI), published monthly.

Although the April CPI figure of 2.8% exceeds the Bank’s target, it is far below the 11.1% peak in October 2022.

That was the highest rate in 40 years.

The April decline, indicating slower price increases, was larger than anticipated.

It largely resulted from the government’s energy price cap reduction for April to June, cutting typical annual household bills by £117.

However, the next cap, effective 1 July, is expected to rise due to higher wholesale energy costs.

Given the volatility of food and energy prices, the Bank of England also considers measures like “core inflation” when deciding rate changes.

Core CPI was 2.5% in the 12 months to April, down from 3.1% in March.

UK inflation had been forecast to remain at or near the 2% target over five years, according to official projections alongside Chancellor Rachel Reeves’ Spring Statement on 3 March.

But those predictions were made before the Iran war.

In April, the Bank of England warned inflation could reach as high as 6% in a worst-case scenario.

Although inflation has dropped significantly since October 2022, prices have not fallen; they are rising more slowly.

Inflation surged in 2022 due to increased oil and gas demand after the Covid pandemic and energy price spikes following Russia’s invasion of Ukraine.

It remained well above the 2% target, partly because of higher food prices.

The April 2026 figures show food price inflation fell to 3% from 3.7% in the year to March 2026.

However, cost increases in the food supply chain can take seven to 13 months to reach supermarket shelves.

The Food and Drink Federation, representing manufacturers, warns food inflation could reach 10% by the end of 2026.

Employees facing higher living costs are more likely to demand pay rises.

Firms already dealing with higher staff costs from increased employer National Insurance contributions and minimum wage hikes face pressure to raise prices, potentially fueling inflation.

When inflation was well above the 2% target, the Bank of England raised interest rates to 5.25%, a 16-year high.

Higher borrowing costs reduce spending by individuals and businesses, encouraging saving.

This lowers demand for goods and slows price increases.

But it is a balancing act: higher borrowing costs risk harming the economy.

Homeowners face higher mortgage payments, which can outweigh better savings deals.

Businesses borrow less, making them less likely to create jobs; some may cut staff and reduce investment.

In recent months, inflation has remained above target while the economy has been relatively flat and the job market has softened.

Therefore, the Bank has cut rates despite high inflation to encourage spending, investment, and job creation to boost the economy.

The Bank of England began cutting rates in August 2024.

Six cuts since then brought rates to 3.75%, the lowest since early 2023.

The most recent cut in December 2025 reflected concerns over rising unemployment and weak growth, with policymakers voting 5-4 in favor.

The vote was similarly close in February when policymakers decided to keep rates at 3.75%.

After the February announcement, Bank Governor Andrew Bailey said he expected inflation to be close to the 2% target from spring 2026 onward, providing “scope” for further cuts.

However, the Iran conflict has changed those expectations.

At its March meeting, the Bank’s Monetary Policy Committee voted unanimously to keep rates at 3.75% in anticipation of higher inflation.

At its April meeting, the Bank again held rates at 3.75% but warned of future hikes if oil prices remain high, pushing UK inflation up.

It said there could be “forceful” rises later this year, up to six in a worst-case scenario, potentially bringing the rate to 5.5%.

The next interest rate decision is scheduled for Thursday, 18 June.

The Bank also monitors wage and unemployment trends closely.

The latest official figures show regular pay in the UK grew very slightly more than inflation between January and March 2026.

Average annual growth in regular pay (excluding bonuses) during the three-month period fell to 3.4%, down from 3.6% between December 2025 and February.

After adjusting for inflation, regular wages grew by 0.1% between January and March.

Annual average earnings growth for the quarter was 4.8% in the public sector and 3% in the private sector.

Separate ONS figures showed estimated job vacancies fell by 28,000 to 705,000 between February and April.

The unemployment rate unexpectedly rose to 5% in the three months to March, up from 4.9% in the three months to February.

Analysts said the figures show the first effects of the Iran war on the jobs market and warned demand for workers would likely weaken as the conflict continues.

Early estimates indicate the number of payrolled employees dropped by about 210,000 in April from the previous month, to 30.2 million.

The US and eurozone countries have also tried to limit price increases, but both have lower central bank interest rates than the UK.

The inflation rate for eurozone countries was 3.0% in April, according to EU data, up from 2.6% in March.

Between June 2024 and June 2025, the European Central Bank cut its main interest rate from an all-time high of 4% to 2%, where it has stayed.

In the US, prices rose by 3.8% in the 12 months to April, up from 3.3% in March, the largest inflation rate since May 2023.

In March and again in April, the US Federal Reserve held its target interest rate at a range of 3.50% to 3.75%, the lowest in three years.

But the Fed has consistently come under attack from US President Donald Trump for not cutting rates.

Kevin Warsh, who will lead the bank when current Chairman Jerome Powell’s four-year term ends later in May, is expected to be more in favor of cuts.