UK Inflation Moderates Slightly in March, Falling Short of Expectations but Maintaining Progress Toward 2% Target

British inflation decelerated less than anticipated, reaching a two-and-a-half-year low of 3.2% year-on-year in March, a slight drop from February’s 3.4% surge. However, it surpassed the forecasted 3.1%, primarily attributed to a slowdown in food prices driving the overall decrease in headline inflation.

On a monthly basis, the Consumer Price Index (CPI) remained steady at 0.6% in March.

Core inflation, which excludes the volatile energy, food, and tobacco components, eased to 4.2% in March from February’s 4.5%, missing the consensus of 4.1%. Meanwhile, services inflation, closely monitored by the Bank of England (BoE), dipped to 6.0% last month from 6.1% in February.

Economists anticipate inflation to continue progressing toward the central bank’s 2% target, albeit at a gradual pace and through incremental adjustments.

Given this outlook, policymakers are likely to face pressure to initiate interest rate cuts. However, they will likely demand more substantial evidence of consumer prices stabilizing towards the target before committing to any decisions.

The latest CPI data indicates diverging inflation trends between the US and Britain, as US consumer prices rose for the second consecutive month while continuing to decline in the UK. This discrepancy may further influence central bank policies. The BoE is still expected to lower rates later this year, albeit with reduced expectations regarding the magnitude and pace of cuts. Conversely, top officials at the Federal Reserve have expressed hesitance to embark on a policy easing cycle following recent disappointing economic data.