Inflation in the United Kingdom fell for the second consecutive month in March, dropping to 2.6% year-on-year from February’s 2.8%, according to the Office for National Statistics (ONS).
The decline, driven by lower fuel prices and reduced costs in sectors like recreation and hospitality, exceeded economists’ expectations of a 2.7% rate. While the figure remains above the Bank of England’s 2% target, the easing has intensified expectations of an interest rate cut in May, with markets pricing in a 76.8% probability of a reduction from the current 4.5%.
The March slowdown was attributed to multiple factors such as transport costs, recreation, and culture. A 5.3% annual drop in motor fuel prices was linked to global oil market fluctuations amid US President Donald Trump’s tariff policies, which dampened demand forecasts.
Prices for games, toys, and data processing equipment also fell by 4.2% and 5.1%, respectively. Meanwhile, accommodation services saw a 0.6% monthly decline, reflecting softer consumer spending.
Core inflation, excluding volatile energy and food prices, also eased to 3.4%–down from 3.5% in February–underscoring broader disinflationary trends. However, services inflation remained sticky at 4.7%, highlighting persistent wage pressures and labour market tightness.
Broader economic implications
Despite the positive data, policymakers face a complex landscape. The ONS warned that April’s 12% rise in the Ofgem energy price cap and higher council taxes could push inflation back above 3% by mid-2025. Moreover, Trump’s proposed tariffs on Chinese goods and escalating trade tensions threaten to disrupt supply chains, potentially reigniting price pressures.
The inflation dip comes amid stagnant growth, with GDP shrinking 0.1% in January. Chancellor Rachel Reeves’ Spring Statement, delivered hours after the ONS release, outlined £10 billion in spending cuts to address a widening fiscal deficit, partly caused by higher borrowing costs.
The Office for Budget Responsibility (OBR) halved its 2025 growth forecast to 1%, citing weak productivity and geopolitical uncertainties.
Inflation has fallen significantly from its 2022 peak of 11.1%, but remains above pre-pandemic averages. The Bank of England has cut rates three times since August 2024, reducing borrowing costs from a 16-year high of 5.25%. Markets now anticipate three additional cuts in 2025, potentially lowering rates to 3.75% by year-end.
