UK inflation falls to 3.2% in March, less than anticipated

UK inflation decelerated less than anticipated in March, sparking discussions about the timing of potential interest rate cuts by the Bank of England.

According to the Office for National Statistics, consumer prices increased at an annual rate of 3.2% in March, a slight decline from the 3.4% recorded in February. However, this figure surpassed the economists' forecast of 3.1% polled by the Bank of England.

The March inflation rate remained the lowest in two and a half years, primarily driven by a decrease in food prices. It also notably fell below the 41-year high of 11.% reached in October 2022 and was lower than the US inflation rate for the first time since 2022.

Core inflation, excluding energy, food, alcohol, and tobacco, decreased to 4.2% in March from 4.5% the previous month. Analysts had anticipated a decline to 4.1%.

The UK data comes after the US reported higher-than-expected inflation figures, leading markets to reduce their expectations for central bank interest rate cuts this year. In March, UK inflation fell below that of the US for the first time since early 2022 but remained above the eurozone figure of 2.4%.

The IMF announced on Tuesday its anticipation of UK inflation decreasing from 7.3% in the previous year to 2.5% in 2024 and 2% the following year. During an IMF event in Washington, Bank of England Governor Andrew Bailey deliberated on the threshold of evidence required to justify interest rate cuts amidst declining inflation.

"Our judgement with interest rates is how much do we need to see now to be confident of the (disinflation) process," said Governor Bailey.

Markets anticipated the Bank of England to commence interest rate cuts in either September or November, with approximately 36 basis points of cuts projected by year-end. This contrasts with approximately 40 basis points of cuts expected from the US and about 73 basis points from the European Central Bank.

The ONS data revealed that the decline in UK inflation was primarily influenced by lower food prices, although this was partially counteracted by increasing fuel prices. Food inflation eased to 4% in March from 5% in the previous month, marking a significant drop from the 45-year peak of 19.2% recorded in March 2023.

Official data released on Tuesday revealed that wage annual growth remained robust at 5.6% in the three months up to February. Yet, with rising unemployment and economic inactivity, these statistics presented conflicting indications concerning domestic cost pressures.

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