^{Source: Bloomberg}

UK Inflation Drops to 2.6% in March, Below Forecasts

Inflation in the United Kingdom slowed to 2.6% in March, its lowest level since mid-2021, offering a welcome surprise to consumers and policymakers. According to the Office for National Statistics (ONS), the annual Consumer Price Index (CPI) was down from 2.8% in February and came in lower than economists’ expectations of 2.7%, as polled by Reuters.

This marks a continued cooling of inflation since it peaked at 11.1% in October 2022, amid soaring energy prices and post-pandemic supply chain issues.

Core Inflation Eases But Remains Stubborn

While headline inflation is nearing the Bank of England’s (BOE) 2% target, core inflation—which excludes volatile categories like energy, food, alcohol, and tobacco—remained sticky at 3.4%, down just slightly from 3.5% in February. This suggests underlying price pressures remain.

“The fall in headline inflation is encouraging, but core inflation remains too high for comfort,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

What’s Driving the Drop?

The largest contributors to the fall in inflation were:

• Recreation and culture, particularly falling prices in package holidays and streaming services.
• Motor fuel prices, which dipped due to a recent drop in global oil prices.
• However, clothing and footwear prices rose, becoming the biggest upward contributor in March.

Meanwhile, food price inflation continues to ease, falling to its lowest level since May 2022, helped by stable agricultural commodity prices.

Market Reaction and Rate Cut Outlook

Following the ONS report, the British pound rose 0.25%, trading at $1.3265 against the U.S. dollar, as markets digested the possibility of an earlier-than-expected interest rate cut.

The Bank of England, which kept interest rates at 4.5% in March, is due to meet again on May 8, and analysts now believe a rate cut is more likely—especially in light of slowing economic growth and softening inflation.

“With inflation falling and GDP growth remaining fragile, we expect the BOE to start easing rates by June,” said James Smith, economist at ING.

Economic Growth Still Fragile

Recent economic data paints a mixed picture. The UK economy expanded 0.5% in February, recovering from a shallow recession in the second half of 2024. Still, the Bank of England cut its 2025 growth forecast to just 0.75%, citing global uncertainty and waning consumer demand.

The BOE also warned in February that inflation could briefly spike to 3.7% later this year, due to a rise in energy prices and a rebound in regulated utility costs.

Global Trade Tensions Add Pressure

Adding to the uncertainty is the ongoing trade tension with the United States. Under President Donald Trump’s new administration, the U.S. imposed sweeping tariffs that are beginning to ripple across global trade networks. While the UK has so far escaped harsh penalties—facing a baseline 10% tariff on exports to the U.S.—analysts caution that further deterioration in U.S.-EU or U.S.-China relations could have knock-on effects for Britain.

In its last policy report, the BOE acknowledged that “global trade policy uncertainty has intensified,” with new U.S. tariffs triggering retaliatory actions from key partners.

Expert Insight: What’s Next?

Ruth Gregory, deputy chief UK economist at Capital Economics, said the March inflation figures are likely a temporary dip.

“Inflation could rise again to around 3.5% in the coming months, but the broader trend will be downward,” she said in a note to clients. “We expect inflation to settle around 2.0% by 2026, though risks are skewed to the downside due to weakening demand and potential tariff spillovers.”

Final Thoughts

While March’s inflation data offers hope to households and businesses grappling with cost-of-living pressures, core price pressures and global headwinds suggest the battle against inflation isn’t over. The Bank of England’s next move will be closely watched—not just by traders, but by anyone with a mortgage, loan, or stake in the UK’s economic recovery.

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