Markets expect UK inflation to have risen sharply in April when the Office for National Statistics reveals its latest economic data on Wednesday, prompting questions about the work of central banks to fight price rises amid US tariffs.
According to the latest FactSet consensus, investors expect the UK consumer prices index to have increased by 3% year over year in April, a sharp increase from the 2.6% recorded for March and a whole one percentage point above the Bank of England’s inflation target of 2%.
The announcement comes amid significant disruption to investor expectations following the launch of protectionist tariffs by the US government under President Donald Trump.
The Bank of England Predicts UK Inflation to Rise
For its part, the Bank of England has been consistently predicting that inflation will likely rise once more because of year-over-year comparisons for energy prices, after a brief period when inflation hit the 2% target in May 2024.
This typically occurs at the start of April as providers put up prices. This year, Ofgem also lifted its quarterly price cap at the start of the month to £1,849, 6.4% higher than in the previous quarter.
The bank outlined this view in its quarterly Monetary Policy Report in February 2025, and once more earlier this month when its second report of the year accompanied a quarter-point rate cut. The UK’s base rate currently sits at 4.25% after four quarter-point rate cuts.
“Inflation is likely to rise to 3.7% by September. This is partly because of increases in energy prices and increases in some regulated prices such as water bills,” the MPC said on May 8.
“Inflation is expected to fall back to the 2% target after that. But there are risks around this path of inflation. Inflation could stay higher than expected if the prices of some services continue to rise quite quickly.
“On the other hand, demand in the economy could be weaker than expected, which would lower prices.”
Why Are Prices Rising in the UK?
When the ONS issued its UK inflation data for the 12 months to March 2025 last month, CPI rose by 2.6%. This was lower than the 2.8% reading in February.
At the time, the largest contributions to price rises for March had been alcohol and tobacco, communications, and owner-occupier housing costs.
This time around, the data for April 2025 will likely show significant increases in energy costs, reflecting providers’ annual bill increases. The UK is also in the midst of a very warm spring, so it’s possible that demand for recreational products and services will start to show in April’s data as retailers cater to consumers eager to enjoy the sun.
This balance between economic activity and price rises is delicate. The chancellor, Rachel Reeves, has wedded her department to fostering growth, a job made harder by tariffs. Inflation is still persistent. Good news appears fleeting, although ministers will cling to the better-than-expected growth figures for the first quarter.
“The UK economy beat expectations in Q1 with 0.7% growth, offering a rare dose of optimism,” says Lale Akoner, global market analyst at eToro, in a note last week.
“Services were strong, production bounced back, but any celebration should be brief. Data ends just before Donald Trump kicked off a fresh round of trade tensions in April, which means the real test is coming in Q2,” she said.
“Meanwhile, the Bank of England, fresh off a rate cut to 4.25%, remains boxed in. Inflation is still sticky, wage growth is firm, and policymakers are signaling caution on further easing.”
Will the Bank of England Continue to Cut Interest Rates?
The MPC next meets in June, and will meet again in August, September, November, and December. Interest-rate swaps data forecasts a rate hold in June, followed by cuts in August and again in November—after inflation is projected to peak.
If this is correct, it means the bank will have delivered four cuts in 2025, one fewer than markets predicted prior to the latest rate cut in May. This chimes with some experts’ predictions for a quarterly rhythm to rate cuts, coinciding with the monetary policy report in February, May, August, and November.
In an inflationary environment, where CPI is well above the Bank of England’s target, economists and investors might typically expect the bank to hold or increase rates to “cool” the economy. The bank’s recent cut in May in some ways puts it out of step with its own expectations of rising inflation.
But some commentators urge caution about this view, arguing that the bank still has plenty of “wiggle room.” Further rate cuts are possible. The European Central Bank has already cut multiple times in this cycle, and interest rates are significantly lower in the eurozone than in the UK.
“The rise coming for April is mainly driven by us lapping lower energy prices, which fell massively this time last year,” says Morningstar’s chief European market strategist, Michael Field.
“The effect could heighten over the coming months, meaning higher inflation again. But the effects are temporary and that’s how the BOE will view it.
“Interest rates in the UK are still the highest in the Western world, so the bank has plenty of room for maneuver, even if high inflation persists for a few months.”
How Will Stock and Bond Markets React on Wednesday?
How markets react to Wednesday’s news will very much depend on whether the news is better or worse than expected.
“The market should be well aware of the spike in April, so if inflation comes in lower markets should get a modest bounce,” Field says. Likewise, if it is marginally worse than expected, UK stock markets will likely fall.
In the bond markets, UK gilts have been increasing over the last month, and are up significantly over the past 12 months, offering inflation-beating opportunities. Even with sticky inflation, yields on the five-year, 10-year, and 30-year gilt are all still above 4%, at 4.11%, 4.62%, and 5.36%, respectively.
If inflation comes in higher than expected, demand for bonds offering higher yields will likely put upward pressure on pricing. Bond yields and prices move in opposite directions: demand for bonds raises prices but weakens yields.
The picture is, however, uncertain. Nobody is quite yet sure which of the tariffs’ supposed effects will be more pernicious: rising inflation or falling growth. For its part, the Bank of England is leaning toward tariffs being deflationary.
“We often use the expression ‘past returns are not indicative of future returns’ because it is important to stress how much the future may turn out to be different from the past even when starting conditions look alike,” says Nicolo Bragazza
“As historical outcomes are just one outcome among an infinite number of possible paths, this observation needs to be factored in when we invest.
“This means positioning your portfolio for a single outcome—even if it is based on a thorough investigation of the past—may result in unintended outcomes and losses.
“It is not a sensible strategy to navigate a world of uncertainty.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
Correction: (May 16, 2025): A previous version of this article misspelled the name of eToro analyst Lale Akoner.
