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Pound sterling softened after inflation undershot expectations, but prices will rise sharply again in the coming months.
British inflation rose 2.8% y/y in April, said the ONS, down from 3.3% in the 12 months to March 2026 and noticeably below market expectations for 3.0%.
The undershoot was driven by flattering seasonals as a spike in inflation a year earlier falls out of the year-on-year comparisons.
Nevertheless, that inflation undershot expectations by such a margin suggests the looming pick-up in inflation that is expected in the coming months won't be as severe as previously thought.
"While still comfortably above the Bank of England’s 2% target, there is some comfort for consumers that the energy price cap fell 7% in April as costs relating to renewable energy support mechanisms moved from domestic energy bills to general taxation. While this respite is clearly welcomed, it will be short lived as the energy price cap is expected to rise nearly 13% in July," says Lindsay James, investment strategist at Quilter.
Core CPI, which the Bank of England pays close attention too, fell from 2.6% in March to 2.5% in April, versus the 2.6% forecast.
"This improvement is set to be short-lived as the impact from the Middle East conflict continues to build, with motor fuel prices rising at the fastest pace since the Ukraine war," says Anna Leach, Chief Economist at the Institute of Directors.
The data eases the urgency for the Bank of England to raise interest rates, but there remain question marks as to the extent of the upcoming uplift in inflation as helpful technicalities fade and the effects of the Middle East war increasingly show up in the data.
Leach says inflation is set to remain elevated, as higher energy and commodity prices spread across supply chains and household energy bills rise again.
"In the context of the energy price shock, this moderation in inflation isn’t a development to be dwelt upon. It is set to be very short-lived as direct and indirect pressures from higher fuel costs kick in and send CPI back into letter-writing territory above 3% y/y," says Sam Hill, Head of Market Insights at Lloyds Bank.
The pound's initial response was to weaken against all its peers, before quickly paring losses as the challenges ahead were accounted for: the pound-euro exchange rate sliding to 1.1537 in the minutes following the release, before stabilising near 1.1543.
The pound-dollar pair dropped to 1.3378 and then recovered to 1.3390.
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