Inflation expected to ease slightly in March amid uncertain future
Inflation in the month to March is expected to remain well above the Bank of England’s target rate of two per cent, putting policymakers in an awkward position ahead of a potential interest rate cut in May.
A Bloomberg poll of economists said that consumer price inflation (CPI) on a year-on-year basis will hit 2.7 per cent, which is one decimal point lower than the figure seen in the month before.
Soaring alcohol prices and expensive apps drove the high rate of inflation in February.
The UK is still on its comedown from a peak inflation rate of 11 per cent in late 2022.
Inflation has proved stickier than initially expected after food prices continued to rise at a fast pace. Energy prices in the UK are also much higher than those seen across the Channel in France.
The Bank of England’s last forecast in March estimated that inflation would hit a peak of 3.75 per cent this year while the UK’s fiscal watchdog believed inflation would hit 3.2 per cent.
But those forecasts are likely of no interest to policymakers and economists since President Donald Trump introduced sweeping tariffs on all vehicle and steel imports, plus aggressive tariffs on goods from China and Canada.
A “baseline” tariff of ten per cent on UK goods will also come into effect in three months unless a trade deal can be agreed.
Uncertain future
Most economists have said that President Trump’s sweeping tariffs from China will have a deflationary effect on prices in the UK due to weaker demand and cheap products flooding into Britain.
The Bank’s Clare Lombardelli and Sarah Breeden took a cautious approach when they were asked about the effect tariffs would have on prices as both flailed the impacts remained unclear.
Fellow policymakers Swati Dhingra and Megan Greene have said, in blunter terms, that tariffs would weigh down on inflation.
Chancellor Rachel Reeves’ hike to employers’ national insurance contributions, which came into effect in April, is making forecasters’ lives harder as firms have said they expected to pass costs onto consumers by raising prices.
Wages have also continued to rise at a rapid pace as Office for National Statistics (ONS) data this morning said average weekly earnings grew 5.9 per cent in the three months up to February.
Oxford Economics’ Andrew Goodwin now predicts that inflation will average three per cent this year, down from a previous forecast of 3.2 per cent.
“The main factor behind changes to our inflation forecast has been the financial market response to the [tariff] announcements,” Goodwin wrote in a report published today.
“The dollar has weakened against most currencies, including sterling, while oil and to a lesser extent European gas prices have fallen. We expect the bulk of these shifts to hold in the near term, leading us to nudge down our forecasts for UK petrol and domestic energy prices.”
Analysts at Pantheon Macroeconomics believe the “inflationary impulse” of the trade war remains unclear as it said inflation this year could still be nearly double the Bank’s target.
They added that services inflation may ease slightly for the March reading from five per cent to 4.9 per cent.
Markets have responded to the tariffs by pricing in up to four interest rates up until the end of the year as most expect the Bank to ease demand-side pressures.