UK inflation fell to its lowest level in three months during March, offering some temporary relief to households. The latest figures showed the annual rate dropped to 2.6%, down from 2.8% in February. This was slightly below the Bank of England’s expectations, as well as estimates from a Reuters poll of economists.
According to the Office for National Statistics (ONS), the decrease was largely driven by lower prices for computer games and cheaper fuel. However, the cost of clothing rose sharply, bouncing back after an unexpected dip the previous month.
Despite this slowdown, experts are warning that the respite might be short-lived. Former Bank of England policymaker Michael Saunders referred to the current conditions as “the calm before the storm”, citing upcoming increases in utility bills and employer taxes set to come into effect in April.
These higher costs for gas, electricity and water, combined with tax changes impacting businesses, are expected to drive inflation back up. Saunders predicted that inflation could climb towards 3% in the coming months as a result.
He also mentioned external pressures, particularly those stemming from U.S. President Donald Trump’s trade policies. Saunders warned that the impact of trade tensions could weigh further on the UK economy.
Speaking to BBC Radio, Saunders noted that although inflation is now unlikely to reach the Bank of England’s earlier forecast of 3.7% by the third quarter, the UK may still suffer from slower economic growth due to these pressures.
Overall, while March’s inflation figures offer a momentary dip, analysts believe that price pressures are set to rise again. The outlook remains uncertain as domestic and international challenges continue to mount.
The Bank of England will likely factor in these developments when considering future interest rate decisions, especially with April’s expected cost increases yet to be fully reflected in the data.
As the economic picture evolves, households and businesses may need to prepare for tighter budgets and shifting market conditions in the months ahead.
The Bank of England, which aims to keep inflation at 2%, had previously forecast that inflation would rise sharply in April. In its February projections, the central bank anticipated a jump to 3.6%, largely due to an increase in regulated household utility tariffs.
However, global economic conditions have since shifted. U.S. President Donald Trump’s decision to introduce widespread trade tariffs has heightened fears of a potential slowdown in the world economy.
These developments have added a new layer of uncertainty to the inflation outlook in the UK. The effect of U.S. tariffs could be mixed—possibly pushing inflation higher by increasing costs, or lower if they weaken global demand and reduce pricing pressures.
Martin Sartorius, principal economist at the Confederation of British Industry (CBI), commented on the situation. He noted that the new U.S. tariffs might create both upward and downward forces on UK inflation, depending on how the global economy responds.
Despite these conflicting pressures, Sartorius suggested that the Bank of England may still choose to reduce interest rates in the coming month. Lower rates could help cushion the economy against potential external shocks and slowing growth.
As the UK navigates a fragile global environment, policymakers are keeping a close eye on inflation data and international developments. The coming months will be critical in determining whether the Bank will adjust its monetary policy stance.
Financial markets are now placing an estimated 86% chance on the Bank of England (BoE) reducing its benchmark Bank Rate by a quarter of a percentage point during its next monetary policy announcement on May 8. This marks an increase from the previous 80% likelihood, which was forecast before the release of the latest inflation data.
Martin Sartorius, principal economist at the Confederation of British Industry (CBI), commented on the BoE’s likely approach. He noted, “Looking ahead, we expect them to continue their ‘gradual and careful’ approach to reducing borrowing costs, particularly given the uncertain economic environment we are facing.”
BoE Deputy Governors Clare Lombardelli and Sarah Breeden, along with Monetary Policy Committee member Megan Greene, have all stated that it is too early to fully assess the inflation implications stemming from President Trump’s recent actions.
Trade experts have suggested that China is likely to redirect its exports to Europe, following its effective exclusion from the U.S. market due to the high tariffs imposed on the Asian powerhouse.
In response to the data, sterling fell by about a fifth of a cent against the US dollar after the figures were published.
Meanwhile, inflation in the eurozone also saw a decline in March, dropping to 2.2%, while in the U.S., it eased to 2.4%.
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