Last month, inflation in the United Kingdom showed a moderate decrease to 2.8%.
The mentioned information was published on Wednesday, March 26, by the Office for National Statistics (ONS). At the same time, it is worth noting that economists surveyed by the media predicted that the consumer price index in the United Kingdom would hit 2.9% in the twelve months to February.
In January, the UK’s inflation rate was recorded at the 3% mark. In this case, the indicator showed a sharp increase. The corresponding dynamic was recorded after inflation in the United Kingdom fell to 2.5% in December. This decrease in the indicator turned out to be more extensive than the preliminary expectations.
Core inflation, which does not take into account volatile prices for food, energy, alcohol, and tobacco, was 3.5% in the United Kingdom in February. In January, this figure was recorded at the 3.7% mark.
The ONS statement noted that the slowdown in inflation in the United Kingdom in February reflected downward contributions from four divisions and upward contributions from five divisions. It was also highlighted that the largest downward contributions came from clothing and footwear, housing and household services, and recreation and culture.
After the data on the dynamic of inflation in the United Kingdom was published in February, the pound sterling fell by 0.1% against the dollar, to 1.2925.
The mentioned data will become a kind of platform for the Bank of England’s reflections, which decided last week at its monetary policy meeting to keep interest rates at 4.5%. The financial regulator noted that the specified decision is because the United Kingdom’s economic system is currently facing uncertainty regarding global trade policies, possible tariffs, projected temporary increases in inflation, and looming stagnation.
Moreover, the Bank of England said that uncertainty about the global trade policy has intensified. It was also noted that the United States made a range of tariff announcements, to which some governments responded. Apart from that, the central bank of the United Kingdom noted that other geopolitical uncertainties have also increased. Separately, it was highlighted that financial market volatility indicators have grown worldwide.
It is worth mentioning that last month the Bank of England warned that it expects a temporary increase in inflation to 3.7% in the third quarter of the current year. The financial regulator stated that this forecast is related to the expectation of accelerating energy costs. The Bank of England has also halved its forecast for economic growth in the United Kingdom for 2025. The financial regulator expects UK gross domestic product (GDP) to increase by 0.75% in the current year.
It is worth noting that also on Wednesday, the United Kingdom’s Chancellor of the Exchequer Rachel Reeves announced a package of politically divisive cuts to welfare and government spending. These measures are related to the intention to fill the gap in the country’s finances after lowering the economic growth forecast for 2025.
The Labour government was forced to turn to cuts, as the weak increase in GDP and the rise in borrowing costs caused Rachel Reeves to break the budget rule, which she uses to reassure markets of her fiscal prudence. The Chancellor of the Exchequer had ruled out further tax growth after the 40 billion pounds ($51.5 billion) extra levies in the October budget were unequivocally negatively perceived by representatives of British business.
On Wednesday, Rachel Reeves’ midyear economic update to fellow lawmakers detailed a 14 billion pound package of measures to put her on a path to meet her fiscal rules. In this case, 8.4 billion pounds will come from welfare and day-to-day spending cuts. Another 3.4 billion pounds consists of higher revenues from the government’s planning reforms. Also, 2.2 billion pounds will come from a more efficient tax collection.
Rachel Reeves stated that there is nothing progressive about working people paying the price of economic irresponsibility. She also noted that the British people put their trust in the current government because they knew that it would never take risks with the public finances.
The data, published by the Office for Budget Responsibility (OBR), provides for the expectation that the United Kingdom’s economic system will show growth of 1% in 2025. The previous version of the forecast provided that the country’s GDP will increase by 2% in the current year. It is worth noting that this downgrade was generally expected.
Debt markets probably reacted positively to the emphasis on fiscal responsibility. Gilts rallied after the United Kingdom government announced a lower-than-expected slate of bond sales for the upcoming fiscal year.
The yield on 30-year debt fell by 9 basis points to 5.28%. The United Kingdom plans to sell bonds worth 299 billion pounds. At the same time, market participants interviewed by the media expected the corresponding figure to be 302 billion pounds. This is one of the biggest issuance programs on record.
It is worth noting that the GDP of the United Kingdom showed almost no growth after the Labour Party won a landslide victory in the elections last summer.
Rachel Reeves stated that the world has changed, and in this context drew attention to the factors that have an impact on economic growth. She noted that the President of the United States, Donald Trump, has upended the global trading system with widespread tariffs, while European governments divert billions towards defense spending.
The OBR stated that the probability of Rachel Reeves meeting her fiscal rule in her autumn budget is only 54%. It was noted that against the background of the relevant perspective, the likelihood of another set of major changes increases before the end of the current year.
The realization of the tariff threat from the United States may become a serious challenge to the economic system of the United Kingdom. If the US imposes levies on all its trading partners, including the UK, it would leave Labour in deficit.
Paul Dales, chief UK economist at Capital Economics, warned that the latest inflation print will not help the Bank of England or Rachel Reeves much. The expert predicts that inflation in the United Kingdom will exceed 3% next month, and by September this figure will be about 3.5%. It was noted that this circumstance and the risk of spillovers into wages are likely to cause the Bank of England to press pause on lowering borrowing costs in the coming months. The expert also considers as a realistic scenario that inflation in the United Kingdom will decrease to 2% next year. Paul Dales said that the materialization of this probability in the space of economic reality would mean cutting interest rates from 4.5% to 3.5%. At the same time, the potential implementation of Donald Trump’s tariff threat will significantly change the situation. This scenario is not guaranteed, but it is realistic. If London is faced with a tightening of Washington’s trade policy, this will inevitably affect inflation, and, most likely, the Bank of England will have to make other decisions.
