UK Inflation Dip Offers Households Relief Before Bills Rise
UK inflation slipped back for a second straight month, providing some relief for households before they were hit by a huge increase in bills in April.
Consumer prices rose 2.6% in the 12 months to March, an easing from the 2.8% increase in February, the Office for National Statistics said Wednesday. It was the weakest inflation since December and below the 2.7% predicted by economists and the Bank of England.
The slowdown was driven by cheaper computer games, falling fuel prices and unchanged food costs, the ONS said. Services inflation, which is being watched closely by the Bank of England for signs of domestic price pressures, fell to 4.7% from 5%. The UK central bank had expected 4.9%.
The data followed signs of a rapidly cooling labor market on Tuesday and is the final inflation print before the BOE’s next policy decision is announced on May 8. The fall in inflation is some consolation for consumers who will see basic costs from council tax to energy and water bills rise by £600 ($795.81) on average in the financial year that began this month. That’s expected to push inflation well above 3% by the summer.
For the BOE, however, any pickup in inflation will be overshadowed by the fallout of Donald Trump’s trade war transforming the outlook on prices.
The White House’s tariff skirmishes have tightened financial conditions, sent energy prices sliding, weakened the dollar and darkened the global growth outlook, prompting traders to bet on more interest-rate cuts from the BOE — including a quarter-point move on May 8. There could also be trade diversion effects for officials to consider if exporters shut out of US markets, particularly China, seek other markets for their goods by discounting prices.
Traders added to bets on interest-rate cuts by the BOE in the wake of the release, and now see at least three quarter-point reductions by the end of the year with an almost 50% chance of a fourth. Meanwhile, the pound held gains, trading 0.3% higher at $1.3273. It earlier hit a fresh six-month high as it heads for its longest winning streak since July.
“Inflation risks have certainly not vanished but the Bank of England will now increasingly feel the need to weigh upside inflation risks against downside risks to growth,” said Zara Nokes, Global Market Analyst at J.P. Morgan Asset Management. “If the labour market deteriorates meaningfully following the hike in employer NICs this month, pressure on the Bank to ramp up rate cuts will only intensify.”
The ONS said prices overall rose by 0.3% in March compared to the 0.6% increase a year earlier. Annual goods inflation cooled to 0.6%, even before the fallout from the US tariffs starts to impact trade. Computer games helped to drive inflation in the recreation and culture category lower, and the 3% rise in prices in hotels, cafes and restaurants was also the weakest since the summer of 2021.
In a statement following the figures, Chancellor of the Exchequer Rachel Reeves said another fall in inflation and rising wages are encouraging but “there is more to be done.”
BOE officials have been reluctant to endorse the view that the tariffs will curb UK inflation, amid the wild swings in Trump’s trade policy.
In recent weeks, BOE Deputy Governor Sarah Breeden and rate-setter Megan Greene have said the impact on prices is still unclear, highlighting moves on currency markets as important to the outlook. Policymakers also have to contend with a cooling labor market. Tax data on Tuesday showed employment dropping at the fastest pace since Covid in March, just before employers were hit by a jump in payroll taxes and a higher minimum wage.
Private-sector forecasters have been bolder in predicting that the tariffs will mean lower inflation later this year. Major banks, including Goldman Sachs and Deutsche Bank, have trimmed their forecasts for price growth in recent weeks.
“The deflationary impact of the tariffs could provide the Bank of England with more room to cut interest rates, provided underlying inflationary pressures continue to moderate,” said Yael Selfin, chief economist at KPMG UK.
Source : Bloomberg
