Inflation in the United Kingdom cooled to its lowest level in nearly three years in April, driven by big declines in domestic bills, official figures showed Wednesday, easing a cost-of-living crunch before this year's general election.

The Office for National Statistics (ONS) said inflation, as measured by the consumer prices index (CPI), fell to 2.3% in the year to April, down from 3.2% in March.

Despite the sharp decline, the gauge dashed market expectations of a deeper slowdown to 2.1%, prompting investors to pull bets on an interest rate cut next month, which could have boosted embattled Prime Minister Rishi Sunak.

The April figure is the lowest level since July 2021, when the global economy was still being held back by the coronavirus pandemic.

The fall also takes inflation nearer to the Bank of England's (BoE) target rate of 2% and is likely to pile pressure on its nine-member rate-setting panel to cut interest rates from the current 16-year high of 5.25%.

Services inflation – a key gauge of domestically generated price pressure for the BoE – was much higher than expected, while petrol prices also rose.

Sterling jumped after the data, and investors priced the chance of a BoE rate cut in June at just 18%, down from 50% on Tuesday.

Economists had expected a sharper drop in inflation after a 12% drop in regulated household energy tariffs that took effect last month.

"This is only one month’s data, but it is enough of a surprise to suggest that the inflation process is not tracking as the BoE had expected," Allan Monks, chief U.K. economist at JPMorgan, said.

"There is still another labor market and CPI report to come before the June meeting, but it is difficult for us to see what that could realistically do to leave most members feeling confident about cutting in June specifically."

Services inflation inched down to 5.9% from 6% in March. The BoE's forecasts had pointed to a reading of 5.5%.

June rate cut 'off the table'

Analysts at RBC Capital said the overshoot in services inflation did not appear to be driven by one-off factors, suggesting further stickiness in prices ahead.

"Certainly, this morning takes June off the table," Cathal Kennedy, senior U.K. economist at RBC Capital Markets, said.

"We’ve been saying for some time that we thought services inflation would be a lot harder to get down than perhaps some other people out there thought, particularly with the backdrop of the U.K. labor market, which has loosened but is still very, very tight."

Core inflation, which includes goods but not energy, food and tobacco, also reflected persistent price pressures, with the annual rate falling only to 3.9% from 4.2% in March.

The next rate meeting is on June 20, and many economists think the bank will cut borrowing costs. However, others think that ongoing concerns over the scale of price rises in the crucial services sector and the pace of wage increases make an August reduction more likely.

Though the latest fall in inflation is welcome, it doesn't mean the cost of living crisis – the worst in around 40 years – is over. Lower inflation, after all, shows that prices are rising more slowly than they were before.

"Consumers are still living with far higher prices and how you take today’s inflation data will depend on whether your glass is half full or half empty," said James Smith, research director at the Resolution Foundation.

"While it’s clearly good news headline inflation is back to normal levels, it is disappointing that price pressures haven’t fallen further and that measures of services inflation are proving more stubborn than expected."

Price pressures

Inflation hit a high above 11% at the end of 2022 in the wake of Russia’s invasion of Ukraine, which led to sharp increases in energy costs.

Over the past couple of years, goods and services have risen by 15%, with food prices up even more at around 25%.

The Bank of England, like the U.S. Federal Reserve (Fed) and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia’s invasion of Ukraine.

Higher interest rates – which cool the economy by making it more expensive to borrow, thereby bearing down on spending – have contributed to bringing down inflation worldwide. Figures from last week show that the British economy has started growing again.

Britain’s governing Conservative Party hopes that lower inflation and falling interest rates may trigger a feel-good factor ahead of a general election that has to take place by January 2025. Opinion polls suggest that the main opposition Labour Party is ahead of the Conservatives, who have been in power since 2010.

Sunak, struggling to woo voters back, focused on the fall in headline inflation.

"Today marks a major moment for the economy, with inflation back to normal," he said.

However, the Labour Party said voters were still under pressure from their finances.

"Prices in the shops have soared, mortgage bills have risen and taxes are at a 70-year high," Labour's finance spokesperson Rachel Reeves said.

Wednesday's data mean Britain has a lower inflation rate than the United States, Canada, France and Germany. Japan has yet to report April inflation data. Italy's inflation rate is 0.9%.

Still, Britain ranks poorly among Western European countries for its inflation record since 2020, with consumer prices up by more than 22% over that time frame – with only the Netherlands, Austria and Germany faring as badly.

The BoE has forecast the CPI to rise again later this year to end 2024 at around 2.6%.

Recent labor market data has brought mixed news on the price pressures front, with private sector wage growth, excluding bonuses, easing only marginally in the three months to March.

The BoE is concerned that rapid wage growth, which makes up much of the inflation rate in the services sector, could sustain inflationary heat across the economy.

Separate ONS data on Wednesday dealt a further setback to Sunak and Treasury chief Jeremy Hunt, showing public borrowing in April was higher than expected, which raised questions about their ability to deliver tax cuts to voters before the election.