UK Inflation Stronger Than Expected On Higher Fuel Prices

UK inflation slowed less than expected last month, underscoring the reluctance of some Bank of England officials to begin cutting interest rates.

A price label on racks of clothing on a market stall in the Tower Hamlets borough of London.
A price label on racks of clothing on a market stall in the Tower Hamlets borough of London.

UK inflation slowed less than expected last month as fuel prices crept higher, underscoring the reluctance of central bankers to begin cutting interest rates.

Consumer prices rose 3.2% in March compared with a year earlier, down from 3.4% in February, the Office for National Statistics said Wednesday. While it was the lowest since September 2021, the BOE and private-sector economists had expected a reading of 3.1%.

UK Inflation Stronger Than Expected On Higher Fuel Prices

Britain had the worst inflation problem in the Group of Seven nations last year but has brought down the pace of price increases sharply from 11% in late 2022. While Governor Andrew Bailey and his colleagues expect it to drop to the 2% target later this year, they’re looking for more firm evidence that those pressures will subside before acting.

The pound reversed earlier losses after the data, rising as much as 0.2% to $1.2445 and snapping three days of declines. The currency is down 2.4% against the dollar so far this year. Investors scaled back bets for rate cuts, leaving the first move not priced in until November — at least three months later than anticipated just a few weeks ago.

The outlook for UK borrowing costs has swung sharply in recent days after US inflation surprised on the upside, prompting Federal Reserve Chair Jerome Powell to warn last night that rates there may stay higher for longer than markets expect. 

Bailey struck a different tone Tuesday, noting a “divergence” between the US economy and those in Europe, a hint that the BOE might be able to ease policy before the Fed. Yet Wednesday’s figures were a reminder of his previous warnings that it may take some time to ensure inflationary forces are suppressed.

The ONS said food prices rose less than a year ago, putting downward pressure on inflation. This was partially offset by an increase in the cost of motor fuel.

UK Inflation Stronger Than Expected On Higher Fuel Prices

Core inflation, which excludes energy, food, alcohol and tobacco, fell to 4.2% last month from 4.5%. That also was stronger that economists had expected. Meanwhile, inflation in the services sector — watched by the BOE for indications of domestically driven price pressures — eased to 6% from 6.1%. The BOE and economists had expected a decline to 5.8%.

Bailey since February has opened the door to lower rates. But others on the nine-member Monetary Policy Committee have urged caution. Those include Megan Greene, who warned last week that a reduction “should still be a way off.” 

“Though this inflation fall won’t be sufficient to drive a cut in interest rates next month, this outturn may persuade more rate setters to vote to loosen policy, providing a clear signal that rate cuts are on the horizon,” said Suren Thiru, economics director at Institute of Chartered Accountants in England and Wales.

Separate data showed pipeline price pressures easing, with the cost of fuel and raw materials used by producers falling 2.5% in March from a year earlier. The price of goods leaving factory gates rose just 0.6%.

There were stronger pressures in the services sector, where producer prices rose 3.6% in the first quarter from a year earlier. That’s up from 3.5% in the previous quarter.

--With assistance from Andrew Atkinson, Harumi Ichikura and Aline Oyamada.

(Updates with detail from the report.)

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