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Inflation fell back to its lowest level for more than a year last month as a drop in energy prices offset soaring fuel costs, but fears are mounting over a looming cost-of-living squeeze caused by the Iran war.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation fell to 2.8% in April, down from 3.3% in March – and the lowest level since March 2025.

The fall was more than expected, with most economists forecasting a drop to 3%.

A big driver of the expected slowdown came from Ofgem lowering its energy price cap from the start of April by 7%, or £10 a month, for the average household using both electricity and gas – which was driven by Government measures to reduce bills.

But inflation is expected to surge back up as the conflict in the Middle East has sent fuel prices soaring, and is set to see the energy price cap increase significantly from July when it it next updated.

Chancellor Rachel Reeves is expected to outline a package of cost-of-living support this week in response, with an announcement on Thursday reportedly set to see her abandon a planned increase in fuel duty from September alongside targeted energy cost measures.

Ms Reeves said: “The war in Iran is not our war but one we will need to respond to, and the decisions I took in the budget last year have kept inflation down as we deal with global instability.

“We have the right economic plan, and to change course now would risk our economic stability and leave working people worse off.

“We have already taken £117 off energy bills, frozen rail fares, and lifted the two-child limit, and over today and tomorrow I’ll set out the next phase of how we will support UK households.”

The drop in inflation was the largest since September 2024, according to the ONS.

Grant Fitzner, chief economist at the ONS, said: ”There was a notable fall in annual inflation led by lower electricity and gas prices.

“This was due to the Government’s energy bill support package reducing variable and fixed tariffs, along with lower global wholesale energy prices before the conflict in the Middle East, which fed through to the reduction in the Ofgem cap.

“Smaller rises in water and sewage bills and vehicle excise duty than seen last year also helped pull the rate down.

“Food prices, particularly for chocolate and meat products, and the price of package holidays drove inflation down further.

“These were only partially offset by a further increase in petrol and diesel prices, and an uptick in the cost of clothing and footwear.”

The latest data showed fuel prices raced higher again in April after the Iran war sent global oil prices jumping above 100 US dollars a barrel, with petrol 16.6p higher last month to 156.8p a litre – which was the highest since November 2022.

Diesel rocketed by 31.3p to 190p a litre last month, which was also the highest since 2022 in the aftermath of the Ukraine war.

The Bank of England forecast inflation could rise as high as 6.2% in a worst-case scenario where oil and gas prices stay higher for a longer amount of time if the Iran war is not resolved.

In its most benign predictions, the Bank said inflation would peak at 3.6% by the end of this year.

Household energy bills are forecast to jump from July when the regulator sets its next price cap, with the latest predictions from analysts Cornwall Insight suggesting this could be 13% or £209 a year higher.

Thomas Pugh, chief economist at RSM UK, warned April’s inflation respite “won’t last”.

He said: “Looking ahead, inflation will stay around current levels for a few months before jumping higher in July when the utility price cap resets again.

“It will then rise further over the rest of the year as the supply chain impacts of higher oil prices, higher agricultural prices and second-round effects start to be reflected in consumer prices.”

But economists said the lower-than-expected CPI data, combined with official figures on Tuesday showing weaker wage growth and a cooling jobs market, could see the Bank hold off from hiking interest rates.

Matt Swannell, chief economic adviser to the ITEM Club, said: “Today’s data strengthens the case for the Monetary Policy Committee to wait-and-see.

“The risks remain skewed towards rate hikes later in the year, if energy prices remain very high or evidence emerges that the MPC has underestimated the indirect impacts of higher energy prices.”