Inflation eases in March amid looming Bank decision
Inflation remained stubbornly high at 2.6 per cent in March, official data has shown, leaving Bank of England policymakers with a difficult decision to make on interest rates early next month.
The year-on-year increase in consumer price inflation (CPI) was lower than the 2.7 per cent figure forecast in a Bloomberg poll of economists.
The Office for National Statistics (ONS) said services inflation hit 4.7 per cent, which may unsettle policymakers despite a slight drop from the month before.
“Inflation eased again in March, driven by a variety of factors including falling fuel prices and unchanged food costs compared with the price rises we saw this time last year,” ONS chief economist Grant Fitzner said.
Chancellor Rachel Reeves said the latest figures showed “encouraging signs” that government plans were working.
“I know many families are still struggling with the cost of living and this is an anxious time because of a changing world,” she said.
“That is why the Government has boosted pay for three million people by increasing the minimum wage, frozen fuel duty and begun rolling out free breakfast clubs in primary schools.”
The latest inflation data release by the ONS is the last the Bank’s rate-setters will see before they make a critical interest rate decision on May 8.
The figure for March suggests that UK inflation may not fall to the Bank’s two per cent target this year as inflation is likely to see a spike in April.
“The dip in CPI inflation from 2.8 per cent in February to 2.6 per cent in March won’t be sustained for long, with inflation set to rise to around 3.5 per cent in the coming months,” said Capital Economics’ Ruth Gregory.
“But we think a weak economy will quash inflation eventually and that the tariff shock has tilted the balance of risks towards lower inflation and faster falls in interest rates.”
All eyes now on the Bank of England
Economists widely expect interest rates to be cut by 25 basis points at the next decision.
The current rate set is 4.5 per cent. Governor Andrew Bailey is leading the Bank’s “gradual and careful” approach to rate-cutting.
Markets have priced in as many as four cuts this year as most economists believe President Trump’s sweeping tariffs are likely to have a deflationary effect on price growth.
The likelihood of weakened demand, lower energy prices and cheaper goods flooding into the UK from major economies including China has prompted the consultancy Oxford Economics to revise its 2025 inflation rate down to three per cent.
Economists, including the rate-setter and Bank deputy governor Sarah Breeden, fear that higher costs along supply chains that spread throughout the world could in fact push up UK prices higher.
Quilter investment strategist Lindsay James said the future for inflation remains “very uncertain”.
“Nobody quite knows what is going to happen next on President Trump’s tariff rollercoaster, and as such the economic environment will be volatile.”
“There are specific inflationary pressures for the UK, with the new rates of national insurance now in place on employers and the likely upward impact this will have on prices.”
Higher taxes introduced by Chancellor Rachel Reeves have also forced firms to raise prices higher than they would have otherwise liked to in order to maintain profit margins.
Pay growth of 5.9 per cent in February is also likely to weigh heavily on any decision the Bank makes next month.
All eyes will also be on whether the Monetary Policy Committee revises its high inflation estimate for the year, which has inflation peaking at 3.75 per cent.
It is a high estimate when put next to the Office for Budget Responsibility (OBR)’s more modest estimate of 3.2 per cent.