Inflation in the U.K. eased to 3.2% in March, the Office for National Statistics said on Wednesday.
That was slightly higher than the forecast from economists polled by Reuters of 3.1%, but was down from 3.4% in February.
Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels pushed it higher.
The core figure, excluding energy, food, alcohol and tobacco, came in at 4.2%, compared with a projection of 4.1%. Services inflation, a key watcher for U.K. monetary policymakers, declined from 6.1% to 6%.
This week, investors have been monitoring signs of a cooling U.K. labor market, with unemployment unexpectedly rising to 4.2% in the period between December and February. Wage growth excluding bonuses meanwhile dipped from 6.1% in January to 6% in February.
Bank of England Governor Andrew Bailey on Tuesday said he saw “strong evidence” that higher interest rates were working to tame the rate of price rises, which has cooled from a peak of 11.1% in October 2022. The central bank’s own forecast is for inflation to “briefly drop” to its 2% target in the spring before increasing slightly.
But a higher-than-expected March core print firmly above 4% is likely to increase speculation that inflation is proving stickier than recent forecasts have suggested, and the timing of the first interest rate cuts may be moving further down the line.
Market pricing currently suggests the BOE will implement two interest rate cuts in 2024 from its current rate of 5.25%, starting in August or September. Uncertainty over this timeline has now increased, given signs of continued inflationary pressures in the U.S.
‘The U.S. direction’
Camille de Courcel, head of European rates strategy at BNP Paribas, on Wednesday told CNBC’s “Squawk Box Europe” that the latest data showed that the U.K. was “going in the U.S. direction” and provided a risk to her call for a June rate cut from the BOE.
While labor data surprised to the downside, the ONS has cautioned its month-on-month figures may be skewed by methodological issues. That means the BOE’s Monetary Policy Committee will be far more focused on upside surprises on wage growth and services, de Courcel said.
The British pound moved higher against both the U.S. dollar and euro following the announcement, trading up 0.1% against the greenback at $1.243 and 0.15% stronger against the euro at 1.1718.
U.K. Finance Minister Jeremy Hunt, who is gearing up for a national election this year, said on social media platform X that the inflation data was “welcome news.”
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The economic impact of the tariffs imposed by the Trump administration will soon become apparent to everyday Americans and lead to a recession this summer, according to Apollo Global Management.
Torsten Slok, chief economist at Apollo, laid out a timeline in a presentation for clients that showed when the impact of tariffs announced by President Donald Trump could hit the U.S. economy. Based on the transport time required for goods to China, U.S. consumers could start to notice trade-related shortages in their local stores next month, according to the presentation.
“The consequence will be empty shelves in US stores in a few weeks and Covid-like shortages for consumers and for firms using Chinese products as intermediate goods,” Slok wrote in a note to clients Friday.
Tariff to recession timeline:
April 2: Tariffs announced, containership departures from China to U.S. slowing
Early-to-mid May: Containerships to U.S. ports come to a stop
Mid-to-late May: Trucking demand comes to a halt, leading to empty shelves and lower sales for companies
Late May to early June: Layoffs in trucking and retail industries
Summer 2025: recession
Source: Apollo Global Management
To support the idea that the U.S. economy is on the verge of recession, the presentation also included data that shows new orders for business, earnings outlooks and capital spending plans have all fallen sharply in recent weeks.
The Trump administration has paused some of the tariffs announced on April 2, but has hiked duties even higher on China. Treasury Secretary Scott Bessent acknowledged Monday on “Squawk Box” that the current tariff standoff with Beijing is “unsustainable.” Levies on goods from China are now subject to a 145% rate.
China is not the only source of consumer goods, but it does have a large role in the U.S. economy. The U.S. imported $438.9 billion of goods from China in 2024, according to the Office of the United States Trade Representative, putting it right behind Mexico and above Canada on the list of trading partners by that metric.
While many on Wall Street are now saying that a recession for the U.S. is likely in 2025, Slok’s predictions are toward the more pessimistic side. Bessent has said the administration expects a “detox period” for the economy due to the trade negotiations but not necessarily a recession.
There is also some evidence of a “pull-forward” in orders from before the tariffs were announced, which could keep goods on the shelves for longer than the Apollo timelines sets out.
“Don’t expect empty shelves yet — [year to date] stock is still up, and demand is slowing,” Bernstein analyst Aneesha Sherman said in a note to clients Monday.
Higher German infrastructure spending will boost Europe’s economic growth in the coming years — but not enough to outweigh the expected drag from U.S. tariffs, according to Alfred Kammer, director of the European department at the International Monetary Fund.
The IMF last week cut its growth outlook for the euro area, also making downgrades for the U.S., U.K. and many Asian countries due to President Donald Trump’s volatile tariff policy.
The institution cut its euro area growth forecasts for each of the next two years by 0.2 percentage points, to 0.8% in 2025 and 1.2% in 2026.
“It’s the tariffs and the trade tensions which weigh on the outlook rather than the positive effects on the fiscal side,” Kammer told CNBC’s Carolin Roth in an interview at the IMF-World Bank Spring Meetings last week.
“What we see is we have a meaningful downgrade for Europe advanced economies… and for the emerging euro area countries double as much over this two-year period.”
The negative impact of tariffs will be slightly offset by Germany’s recent infrastructure spending bill, which will boost growth in the euro area over those two years, Kammer said.
Exemptions passed to Germany’s longstanding debt rules have unlocked higher defense spending and enabled creation of a 500 billion euro ($548 billion) infrastructure and climate fund. The move has been described by economists as a potential “game changer” for the sluggish economy — the largest in the euro zone.
Several policymakers at the European Central Bank told CNBC last week that while the inflation path appeared positive — with tariffs potentially bringing inflation in the bloc down further — their broader outlook was now significantly more uncertain.
The IMF’s Kammer said that the ECB should only cut interest rates once more this year, by a quarter percentage point, despite growth risks.
The ECB has so far reduced rates seven times in quarter-percentage-point increments, starting in June 2024. Its most recent move lower in April took the deposit facility, its key rate, to 2.25%.
“We have a very clear recommendation for the ECB. What we saw so far is a huge success in the disinflation effort and monetary policy has worked … so we are expecting to sustainably hit the 2% inflation target in the second half of 2025,” Kammer told CNBC.
“Our recommendation is there is room for one more 25-basis-point cut, in the summer, and then the ECB should hold that 2% policy rate unless major shocks hit and there is a need for recalibrating monetary policy,” he added.
Overnight index swap pricing on Monday pointed to market expectations for two more quarter-point cuts this year.
SIX ESTEEMED sommeliers sit silently behind a judging table. A waiter tops up their glasses one by one and they appraise the stuff: sniff, hold it to the light, sometimes swirl, sip, swish between cheeks, dump the extras and give it a score. But the liquid is no Zinfandel or Syrah. Instead the bon viveurs are tasting high-end waters.