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UK inflation, March 2024

UK Treasury: We are not out of the woods when it comes to inflation

Inflation in the U.K. eased to 3.2% from 3.4% in March, the Office for National Statistics said on Wednesday, but a set of higher-than-expected figures spurred investors to push back bets on the timing of the first Bank of England rate cut.

Economists polled by Reuters had expected a reading of 3.1%.

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% — again above the expectations of both economists and the BOE.

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.

BOE 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 shifted on Wednesday, with a majority of investors now seeing a first cut of 25 basis points in September or November from the current rate of 5.25%, with only around a 25% likelihood of a June trim.

Uncertainty has also been raised over the path of central banks around the world given signs of continued inflationary pressures in the U.S., with analysts questioning who will move ahead of the Federal Reserve.

‘The U.S. direction’

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