Today’s (21st May) inflation figures have certainly stirred the economic waters. The Office for National Statistics (ONS) reported that UK inflation surged to 3.5% in April, up from 2.6% in March, marking the highest rate in over a year.
What is driving the rise?
Several factors contributed to this unexpected increase:
Energy and utility costs: Gas and electricity prices rose sharply following adjustments in the Ofgem energy price cap. Although wholesale energy costs have fallen compared to previous years, the regulated cap was increased in April, pushing up household bills.
Water charges: Water and sewerage bills rose by 26.1%, the largest annual increase since the late 1980s. This is part of a wider plan to increase investment in water infrastructure, but in the short term it is placing added pressure on consumers.
Council tax and vehicle excise duty: Local authority tax rises came into effect at the beginning of the new tax year, and vehicle tax bands were also increased, contributing further to the inflationary pressure on households.
Transport costs: Airfares and other travel-related costs increased, in part due to seasonal demand and rising business costs in the transport sector.
Wage pressures: The increase in the National Minimum Wage and rising employer National Insurance bills meant many businesses faced higher staffing costs, which are often passed on to consumers through higher prices.
Economic implications
The unexpected rise in inflation will not go unnoticed by policymakers and financial markets. It has several potential knock-on effects:
Interest rate outlook: Until this report, there had been growing expectations that the Bank of England would continue to lower interest rates from their recent peak of 5.25%. A modest cut to 4.25% earlier this month suggested a softening stance. However, with inflation now running well above the Bank’s 2% target, any further reductions may be put on hold. The Monetary Policy Committee will want more evidence that the current rise is temporary before proceeding with further cuts.
Consumer behaviour: Higher prices for essential services such as utilities, council tax, and transport tend to hit lower- and middle-income households hardest. With household budgets already stretched, consumer spending may slow down, which could affect broader economic growth.
Business confidence: For businesses, particularly those in retail, hospitality, and services, rising costs alongside weakening consumer demand could create a difficult environment. Some may delay expansion or hiring decisions, which could weigh on job creation and economic momentum.
Investment and savings: Persistently higher inflation reduces the real return on savings and fixed income investments. While interest rates remain elevated, they may no longer outpace inflation, particularly if inflation proves sticky over the coming months.
What next?
While some inflationary pressures, such as seasonal energy and transport costs, may ease in the coming months, the broader concern is that inflation could remain above target for longer than anticipated. Much will depend on global energy prices, wage trends, and how quickly businesses can absorb costs rather than passing them on.
For now, households and businesses alike should factor in the likelihood that interest rates may stay higher for longer than previously expected. Anyone planning major financial decisions in the second half of 2025 should keep a close eye on inflation reports and central bank updates.