Inflation fell to 2.8% in April but Rachel Reeves is bracing the country for it to spike later this year.
The rate of Consumer Prices Index inflation was down from 3.3% in March, the Office for National Statistics said.
The drop was bigger than expected by the City.
A big driver of the fall 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.
However, the Chancellor made clear that prices are set to rise in coming months due to Donald Trump’s Iran war which has seen the crucial Strait of Hormuz largely closed down by Tehran.
Responding to the figures, 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.”
In a sign of the looming economic problems facing Britain, the Government has relaxed sanctions on Russian crude oil, allowing for the import of jet fuel and diesel refined in third countries amid surging costs.
The move aims to stop widespread disruption to the summer holidays of millions of Brits.
Ms Reeves is also expected to ditch a rise in fuel duty set to hit motorists in September.
Meanwhile, Treasury minister Dan Tomlinson denied a report that the Government was due to urge supermarkets to voluntarily cap the prices of essential groceries such as milk, eggs and bread.
Chipping Barnet MP Mr Tomlinson told Sky News “this isn’t something we’re looking at” when asked if there had been conversations with supermarkets about bringing in price caps.
Shadow Chancellor Sir Mel Stride welcomed the drop in inflation but said: “Prices are still rising far too fast and Labour have left our economy weak and exposed to the impacts of the Iran war.
"The recent spike in borrowing costs shows markets are increasingly worried about Labour’s leadership chaos and economic mismanagement, leaving families to pick up the bill for a £300 Burnham Penalty. “
Meanwhile the British Retail Consortium said the Government “must focus on how it will reduce the public policy costs which are pushing up food prices”.
It issued the demand after the report that the Treasury had asked supermarkets to limit food prices in return for the lifting of some regulations.
The proposals would see shops voluntarily cap the prices of essential groceries such as eggs, bread and milk, according to the Financial Times.
The Treasury has said it would in return offer supermarkets “incentives” which may include easing packaging policies and delay potentially costly changes to healthy food rules, the newspaper said.
Helen Dickinson, the chief executive of the BRC, the leading trade association for retailers, said: “Rather than introduce 1970s style price controls and trying to force retailers to sell goods at a loss, the Government must focus on how it will reduce the public policy costs which are pushing up food prices in the first place.”
UK food inflation rose to 3.7% in April.
Separately, the Government has eased sanctions on Russian crude oil, allowing for the import of jet fuel and diesel refined in third countries amid surging costs.
The Government had previously announced the UK would block Russian oil refined in other countries in a bid to “further restrict the flow of funds to the Kremlin”.
Tory leader Kemi Badenoch called the move to waive some of the sanctions “insane”.
She posted on X: “After 18 months of ‘standing up to Putin’ the Labour govt quietly issued a licence allowing imports of Russian oil refined in third countries.”
It comes amid new figures showing petrol prices have eclipsed the previous high set during the Iran oil crisis.
On Tuesday, the RAC said the average price of a litre of petrol at UK forecourts stands at 158.5p, which is the most expensive it has been since December 2022.
Following the beginning of the conflict in the Middle East on February 28, the price had previously peaked at 158.3p on April 15.
RAC head of policy Simon Williams earlier this week described the recent rise as “bad news for drivers ahead of the bank holiday” and warned prices are set to become even more expensive.”
