UK inflation unexpectedly surges to 3.5% after rate cuts

UK inflation moved in the wrong direction in April, jumping to 3.5% just weeks after the Bank of England cut interest rates.

The new figure, released Wednesday by the Office for National Statistics (ONS), came in higher than the 3.3% forecast by analysts polled by Reuters. It breaks from two months of falling price growth, with the rate at 2.8% in February and 2.6% in March.

Core inflation, which leaves out prices of energy, food, alcohol, and tobacco, rose to 3.8% over the twelve months to April. That number had been 3.4% the month before. 

The ONS said the biggest push came from housing and household services, transport, and recreation. The only part of the economy that helped slow things down a bit was clothing and footwear.

Central bank reacts after price pressure increases

Electricity, gas, and other fuels got more expensive, with prices up 6.7% over the year. The real blow came from water and sewerage bills, which spiked 26.1% in just one month—the steepest monthly rise the ONS has seen since February 1988. These cost increases put more weight on households already dealing with high expenses.

Rachel Reeves, the British Chancellor, said she was “disappointed” with the report. “Cost of living pressures are still weighing down on working people,” she said on Wednesday.

Economists pointed to the energy price cap increase, tax changes in April, the Easter holiday, and even warm weather as reasons behind the unexpected jump. The cap limits how much energy companies can charge. When it goes up, bills follow.

The rise in inflation puts pressure on the Labour government, which has promised to ease living costs for UK households. It also creates problems for the Bank of England, which voted to cut interest rates to 4.25% earlier this month. Some members of the bank’s Monetary Policy Committee (MPC) were already against the cut.

Nicholas Hyett, investment manager at Wealth Club, said the latest data “could cause a bit of a stink” at the BOE. “Two members of the MPC wanted to leave rates unchanged and may well feel vindicated by today’s number,” Hyett said. “Higher core inflation will be particularly concerning since this measure of domestically generated inflation should be easier for the Bank to influence.”

Economists question future rate cut decisions

The BOE had said it expected inflation to climb temporarily to around 3.7% in the third quarter, blaming that prediction on energy prices and higher regulated costs like water bills. Still, the BOE didn’t let that projection stop it from cutting rates in May.

Officials said future cuts would be “gradual and careful,” and they kept their 2% inflation target in focus. The pace of future rate cuts could now slow down if US tariffs hit UK growth harder than expected. The BOE mentioned this as a risk earlier this month, and the latest data may give it another reason to pause.

The news comes just days after the UK reported a surprise 0.7% GDP growth in the first quarter. But economists say that was likely a one-off. Businesses rushed to push activity forward ahead of the US tariffs and April’s domestic tax changes, inflating the number.

Julien Lafargue, chief market strategist at Barclays Private Bank, said this latest inflation report adds noise at a moment when the Bank of England is trying to decide what to do next.

“However, beyond the short-term distortions, we believe the overall direction of travel for UK inflation is lower. This should provide the central bank with room to consider at least a couple more interest rate cuts this year, supporting favorable economic conditions going forward,” he said in a Tuesday email.

But for now, inflation’s not easing. The price squeeze is still real. And whatever breathing room the Bank thought it had may already be gone.