UK inflation rose by less than expected in March 2025, according to new figures from the Office For National Statistics.
The fresh fall in inflation will put pressure on the Bank of England to cut rates in May, amid the global market and economic fallout from the Trump administration’s program of tariffs, which are widely considered to be inflationary.
According to the UK statistics body, inflation, as measured by the Consumer Prices Index, was up 2.6% in the 12 months to March 2025, down from the 2.8% recorded for the 12 months to February. The figures came in below FactSet expectations of a 2.7% increase.
CPIH, the ONS’s preferred measure of inflation that includes owner-occupiers’ housing costs, also fell to 3.4% from 3.7% in February.
“The slowing in the annual rate reflected a large downward effect from motor fuels,” the ONS said.
The average price of petrol fell to 137.5p per liter in March 2025 from 144.8p a year earlier, the ONS reported; diesel prices were at 144.8p per liter in March, down from 154.1p per liter in March 2024.
Why is UK Inflation Falling?
Disinflationary pressure was also visible in the UK economy’s recreational and culture economy, the ONS said. Overall prices in this segment rose by 2.4% in the 12 months to March 2025, a reduction from the 3.4% recorded in the 12 months to February. The March rate was the lowest since October 2021, the ONS added.
“The slowing in the annual rate was the result of relatively small downward effects from a variety of the more detailed classes. The largest came from games, toys and hobbies, and from data processing equipment, where prices fell this year but rose a year ago.”
What Will The Bank of England Do Now?
Falling inflation and energy costs will place renewed pressure on central banks to cut rates. The Bank of England’s target for inflation is 2%, so today’s data shows it is still some way off achieving that again. The Bank briefly met the target in May 2024 before inflation rose once more.
Interest rates are currently 4.50%, with the Bank having made three cuts since the 5.25% peak reached in August 2023.
The ONS figures are also the final measure of UK inflation as it was before several important tax increases came into force this month, including employer National Insurance contributions, which some businesses have already admitted will be offset with price rises. Many other household bills like energy and water also rose in April, as well as broadband and mobile phone contracts.
Even without the unfolding tariff situation, the Bank already expects inflation to rise again toward the end of 2025 before falling back in 2026.
“Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further,” the Bank’s monetary policy committee said in its quarterly report in February.
“While CPI inflation is expected to fall back to around the 2% target thereafter, the [MPC] will pay close attention to any consequent signs of more lasting inflationary pressures.”
The next quarterly report is due in May, the first time that the Bank will officially respond to the new change in trade relations between the US and the world. Changes to inflation, economic growth and interest rate forecasts are expected by economists.
According to overnight interest rate swaps data, traders and investors currently believe there is a 98.2% chance of a rate cut from the European Central Bank when it issues its latest decision on eurozone rates on April 17. The same data shows a 103.1% chance of a rate cut by the Bank of England when it announces its next rate decision on May 8; the next likely dates for a rate cut in the UK are in August and November, according to current market pricing on April 16.
Bank Weighs Up Inflation, Tariffs, Growth
“Given this data and the uncertainty over the impact of US trade tariffs on the economy and inflation, the current MPC guidance of easing the monetary stance in a ‘careful and gradual’ manner seems justified.” says Derek Halpenny, head of research, global markets EMEA & international securities at MUFG.
Zara Nokes, global market analyst at J.P. Morgan Asset Management, says that the Bank has plenty to weigh up ahead of the next meeting.
“Inflation risks have certainly not vanished but the Bank of England will now increasingly feel the need to weigh upside inflation risks against downside risks to growth,” she says.
“The global economy is beginning to stall amid trade policy uncertainty emanating from the US and being a small and open economy leaves the UK exposed to such headwinds.
“Direct tariffs on UK exports, coupled with the risk that US trading partners dump their goods in the UK to avoid US tariffs, could act as a further drag on inflation.
“Simultaneously, while still elevated wage growth has rightly kept the Bank cautious in delivering rate cuts so far, yesterday’s labor market data suggests that cracks are beginning to show. If the labor market deteriorates meaningfully following the hike in employer NICs this month, pressure on the Bank to ramp up rate cuts will only intensify.”
Investors will find out the next UK inflation figures for April 2025 on May 21.
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