UK inflation: Bank of England on track for May

Last week saw the latest UK inflation numbers. A touch lower than expected, UK CPI inflation was 2.6% year-on-year in March down from 2.8% year-on-year in February. Core inflation was in line with expectations – falling a tenth to 3.4% after 3.5%.

Services inflation fell a touch more than expected to 4.7% after 5.0%. Headline and services inflation are a bit below Bank of England (BoE) staff forecasts from February too. 

Looking at the drivers of the down-move, the largest contributions came from the recreation and culture category, and from petrol/diesel prices. On recreation and culture, that seems to have come from a number of components rather than just one of the more obviously volatile ones. There was also a downward contribution from the restaurants and hotels category coming from accommodation. However, with Easter so late this year, that might be impacted by calendar effects.

Still, with most of the main inflation categories contributing negatively to inflation this month and services inflation lower, this should be a somewhat reassuring release for the BoE as far as it goes.

this should be a somewhat reassuring release for the BoE as far as it goes.

UK inflation likely to rise next month: I think that Inflation is likely to jump in April on an increase in utility bills, energy and, to an extent, water bills (though lower oil prices should act as a partial offset). After the rise in bills, the Bank will likely be attentive to any indications of that feeding through into higher inflation expectations or wage demands for example. They remain concerned about the risk that inflation lingers persistently above target.

Beyond that, inflation still looks likely to fall into 2026: While headline inflation may rise a bit higher again later in the year (helped by base effects), I am expecting services inflation to work its way lower into 2026 helped by likely slower pay growth ahead. The labour market seems to be cooling and forward-looking measures of wage growth (e.g. wage expectations in the BoE’s DMP business survey) are consistent with slower pay growth ahead. As services inflation falls, I’d expect CPI inflation to fall into 2026. For more on the UK outlook see: Uncertainty Anxiety.

As for Trump’s tariffs, for now, I haven’t pencilled in large effects. The UK is not in the eye of the tariff storm and the UK is not the one significantly raising tariffs. The impact on the UK seems likely at this stage to be more disinflationary depending on the hit to global/trade growth, the degree of China trade redirection (specifically Chinese producers discounting goods, pushing into non-US markets) and what happens to commodity prices. The impact on the currency will matter too of course. 

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