Key events
UK inflation to head higher again in coming months but markets bet on three rate cuts
Financial markets are betting on an interest rate cut from the Bank of England meeting at its May meeting, estimating an 86% probability.
They have fully priced in three quarter-point rate reductions this year.
The pound softened a tad after the inflation data but is now up 0.3% again against the dollar at $1.3268. Sterling traded at $1.2919 on 1 April, the day before Donald Trump’s ‘liberation day’ when he announced a wave of global tariffs, and has risen 2.7% against the dollar since then.
Matt Swannell, chief economic advisor to the EY Item Club forecasting group, said:
A sharp pickup in inflation from April is all but guaranteed. Ofgem’s 6.4% increase to its price cap, after a large fall last year, means we expect the energy component will add 0.7ppts to CPI inflation in April. A significant increase in water bills means the contribution from the core goods category is also set to rise. In addition, we expect businesses to pass on some of the increase in labour costs caused by the recent rises in employers’ National Insurance Contributions (NICs) and the National Living Wage onto consumers. Inflation is likely to peak in the autumn, before starting to cool as the contribution from the energy category fades.
The MPC has lowered Bank Rate at alternate meetings since its cutting cycle began last summer. With MPC members highlighting the substantial uncertainty associated with the potential inflationary impact of US tariff increases, and the large time lag before the committee sees hard data on how the NICs and National Living Wage rises are playing out, we think the MPC will be content with sticking to its cut-hold tempo for the time being. We expect the next rate cut to come at the MPC’s May meeting.
Inflation will head higher again in the coming months, as Rob Wood, chief UK economist at Pantheon Macroeconomics, explained, although he sees room for interest rate cuts in May, June and November, in the wake of US tariffs which have clouded the economic outlook.
Looking ahead, February was the calm before the storm of annual price resets, government-set price hikes and tax rises boost headline CPI inflation to 3.5% in April and then to a peak of 3.7% in September, in our view.
We agree with the monetary policy committee that the impact of US tariffs on UK inflation will be ambiguous. Some goods previously destined for the US could be diverted to the UK at knockdown prices, slowing inflation and weaker growth will raise unemployment. But large firms may attempt to raise prices everywhere to absorb the cost of US tariff hikes. For instance, Sony raised the price of their PS5 digital games console by 11% in Europe and 10% in the UK from April 14 in response to US tariffs. We also cannot rule out retaliation by the UK government in the coming months, while fracturing global supply chains and weaker trade driving slower productivity growth will be inflationary.
But the MPC has to set policy based on the balance of risks in the medium term as well as the central case. ‘Liberation Day’ has created a much worse worst-case growth scenario than the MPC had to contend with before. Accordingly, the MPC can afford an extra precautionary rate cut this year, so we look for three more reductions in 2025, compared to two before Mr. Trump’s interventions.
It’s a finely balanced call, but we look for back-to-back 25bp cuts in May and June, with another cut in November. That call is highly sensitive to president Trump’s actions, the dataflow and the MPC’s comments; we have heard little from rate setters since ‘Liberation Day’. Rate setters will be cautious—one extra rate cut is a small response to a large economic shock in the form of tariffs—because inflation remains too high for comfort, as does wage growth.
Food price inflation also slowed in the UK, to an annual rate of 3% in March from 3.3% in February, bringing some relief to households still struggling with the cost of living crisis.
Prices for confectionery prices fell this year but rose a year ago. This was partially offset by higher prices for milk, cheese and eggs.
Meanwhile, prices for clothes and footwear rose at an annual rate of 1.1% in March compared with a 0.6% drop in February. Prices usually rise in March as new spring fashions enter the shops, and the increase this year was relatively large following an unusual fall ini prices in February the ONS said.
Jonathan Moyes, head of investment research at the Bristol-based investment service Wealth Club, said:
Whisper it quietly though, were it not for a global trade war, the UK consumer would be in excellent shape. Wage growth is running at 5.6%, a further three interest rate cuts this year will drive mortgage rates lower, food inflation is slowing, as is eating out and travel.
Plus with the oil price in the low 60s, energy prices look to have peaked. If the UK can escape the worst of the global trade war, it might not all be doom and gloom for the UK consumer this year, and we haven’t said that for a while.
As for UK inflation, the Office for National Statistics explained that prices for recreation and culture rose by 2.4% in the 12 months to March, down from 3.4% in February. Prices were unchanged on the month.
The largest downward effect came from games, toys and hobbies, and from data processing equipment, where prices fell this year but rose a year ago.
Transport also helped bring inflation down, as the average price of petrol fell by 1.6p a litre between February and March to stand at 137.5p a litre, down from 144.8p a year ago. Diesel prices fell by 1.6p per litre in March to 144.8p per litre, down from 154.1 in March last year.
Price rises within the restaurants and hotels sector also slowed, to the lowest rate since July 2021.
However, while UK inflation slowed last month, it is likely to go up again in the coming months, economists warn.
Introduction: Asian shares sell off as US curbs on Nvidia chip sales to China fuel trade fears; UK inflation slows to 2.6%
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Asian shares have sold off as US chipmaker Nvidia took a hit from US curbs on chip sales to China, highlighting the damage from the escalating trade war between Washington and Beijing.
Nvidia said it expects a $5.5bn hit after Donald Trump’s administration barred the chip designer from selling its H20 chip in China.
Japan’s Nikkei is down 1.5% while Hong Kong’s Hang Seng lost 2.4% and markets in Shanghai and Shenzhen fell by 0.5% and 1.57% respectively.
Last night Donald Trump ordered an investigation into potential new tariffs on all US critical minerals imports, which comes after similar probes into pharmaceutical and semiconductor imports.
Gold, seen as a safe-haven asset, has jumped by 1.9% to $3,289 an ounce, setting another record high.
Inflation in the UK has slowed more than expected, increasing pressure on the Bank of England to lower interest rates next month.
Annual consumer price inflation fell to 2.6% in March from 2.8% in February, slightly less than the 2.7% forecast by economists.
Inflation was dragged lower by falling fuel prices and flat prices in recreation and culture, which were partly offset by higher prices for clothing and footwear.
The core inflation rate, which strips out volatile energy and food and is closely watched by the Bank of England, dipped to 3.4% from 3.5%.
The chancellor, Rachel Reeves, said:
Inflation falling for two months in a row, wages growing faster than prices and positive growth figures are encouraging signs that our Plan for Change is working, but there is more to be done.
I know many families are still struggling with the cost of living and this is an anxious time because of a changing world. That is why the government has boosted pay for three million people by increasing the minimum wage, frozen fuel duty and begun rolling out free breakfast clubs in primary schools.
China’s economic growth in the first quarter beat expectations, underpinned by consumption and industrial production, but the latest US tariffs of 145% have clouded the outlook.
The world’s second-biggest economy grew by 5.4% between January and March, the same as in the previous quarter.
Industrial production grew more strongly than expected in March, and at the fastest rate since June 2021. Output increased by 7.7% year on year, up from 5.9% in February. All major sectors grew faster. In the first quarter, industrial production grew by 6.5%.
The Agenda
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9am BST: Eurozone inflation final for March
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12.30pm BST: US Retail sales for March
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1.15pm BST: US Industrial production for March
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1.45pm BST: Bank of Canada interest rate decision
