UK inflation drops to 2.8% to give BoE ‘breathing space’

The Office for National Statistics reported today (20 May) that, CPI rose by 0.7% during April 2026, compared with 1.2% in April 2025.

The statistics agency said housing and household services made the largest downward contribution to the change adding that an upward contribution from a spike in motor fuel prices was offset by other categories in transport.

Core CPI (CPI excluding energy, food, alcohol and tobacco) rose by 2.5% in the 12 months up to April 2026, down from 3.1% in the 12 months to March.

Isio chief investment officer Barry Jones said that, while inflation has moderated from the highs seen in recent years, geopolitical tensions, elevated commodity prices and broader supply-side pressures continued to create uncertainty for investors. At the same time, he said there were growing concerns that economic growth could begin to soften across a number of major economies.

He said: "That combination has helped keep stagflation concerns in focus for investors this year. The concern is not simply inflation on its own, but the possibility of inflation remaining elevated at the same time as economic activity slows - creating a much more challenging backdrop for markets and policymakers alike."

Jones said the implications for this on investors was "significant" because the global economy is now far more leveraged than in previous inflationary periods - adding that higher borrowing costs increased refinancing pressures for both governments and corporates, while prolonged inflation can erode real returns and create further volatility across markets.

But he said defined benefit (DB) schemes were better insulated from inflation shocks.

Jones added: "From a pensions perspective, many UK DB schemes are better insulated from inflation shocks than they were historically, largely because of increased hedging and liability-driven investment protections put in place over recent years. However, schemes still need to ensure they have sufficient liquidity and resilience in place should markets experience another period of sharp rate volatility."

XPS head of DB trustee investment Adam Gillespie agreed that underlying inflationary pressures may not be easing as quickly as the headline suggests - noting a key driver of the lower ONS figure was the April change to Ofgem's energy price cap, which reduced household bills and pulled down CPI via lower gas and electricity costs.

But Gillespie said the news for DB scheme funding was more positive, driven far more by movements in the gilt market than by any single monthly CPI print - noting that XPS's DB:UK analysis showed that aggregate surplus remains well above £200bn.

He said: "Gilt yields have risen sharply in recent months and investors remain highly sensitive to the risk of sticky UK inflation and the country's reliance on imported energy - a combination that is helping to keep UK government borrowing costs among the highest in the developed world.

"Attention will now turn to Labour's internal politics and whether any shift in fiscal policy could force markets to reprice both inflation and gilt yields higher. Trustees and sponsors should be alert to these risks and ensure that their hedging strategies have not been knocked off course by the sizeable market moves we have already seen or by further volatility in the months ahead."

Schroders senior economist George Brown said that, while inflation took a step back in April, it was set to leap at the end of spring - noting that higher energy prices look likely to lift inflation above 4% this year, having previously been on course to fall to around the 2% target this summer.

He said: "What matters now is whether this starts to bleed into broader price and wage setting. A softening labour market and fragile growth should limit that risk, but the Bank of England can ill afford to be complacent after years of successive global supply shocks.

"This should keep the Bank sounding hawkish, but we think it will ultimately stop short of hiking rates."