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UK inflation fell more than expected to 2.6 per cent in March, providing some relief for the Bank of England as it braces for the economic impact of US President Donald Trump’s tariffs.
The annual increase in consumer prices, reported by the Office for National Statistics on Wednesday, was below the 2.7 per cent forecast by economists in a Reuters poll and down from 2.8 per cent in February.
The ONS said the biggest contributions to the decline came from recreation and culture, in particular for games, toys and data processing equipment, as well as from lower petrol prices.
The BoE faces a delicate balancing act as it grapples with a deteriorating jobs market and the prospect of a pick-up in inflation later this year, driven in part by higher household bills.
The central bank’s Monetary Policy Committee said last month that it would stick with a “careful and gradual” approach to cutting borrowing costs after holding interest rates at 4.5 per cent.
Services inflation, a key measure of underlying price pressures for rate-setters, slowed more than expected to 4.7 per cent in March from 5 per cent in February. Economists had forecast 4.8 per cent.
Following the release of the figures, traders cemented their bets on at least three quarter-point cuts from the BoE by the end of the year, according to levels implied by swaps markets, with the chance of the first coming at May’s meeting put at 85 per cent.
The pound edged lower against the dollar after the data but remained up 0.2 per cent at $1.326 on the day.
Ruth Gregory, deputy chief UK economist at the consultancy Capital Economics, said that March’s drop would not last long, with inflation set to rise sharply from April as household utility bills increased.
But she added that the tariff shock “has tilted the balance of risks towards lower inflation and faster falls in interest rates”.
The BoE’s challenge has been complicated by Trump’s trade war, with the UK hit by a 10 per cent tariff. The economy is also exposed to the 25 per cent levy the White House has imposed on imported cars and steel.
Clare Lombardelli, a deputy governor at the BoE, said last week that tariffs were likely to depress economic activity but that their effect on inflation would be harder to forecast.
Additional reporting by Ian Smith
