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Investing.com -- Deutsche Bank (ETR:DBKGn) on Friday revised its inflation projections for the U.K., now expecting the Consumer Price Index (CPI) to rise by 3.3% year-over-year, a slight decrease from its previous forecast of 3.4%.
The bank also predicts that the Retail Price Index (RPI) will increase by 4% year-over-year, down from the earlier estimate of 4.2%.
This adjustment came after official data on Friday showed that the U.K. economy expanded by 0.5% in February from the previous month, rebounding from a modest contraction in January and beating economists’ forecasts for a smaller 0.1% increase.
According to Deutsche Bank, the CPI is projected to peak at 3.7% year-over-year, which is marginally lower than earlier projections, influenced by recent trends in energy prices.
Despite this, inflation is expected to pick up through spring and summer due to annual price increases beginning in April, particularly due to higher dual fuel and water/sewerage bills, as well as increased payroll costs impacting sectors like hospitality and leisure.
For March, the bank's forecasts are based on data collected on March 18 and include expectations of a 0.4% month-over-month increase in private rents, a 0.1% rise in other housing services, and a 0.7% increase in mortgage interest payments.
In transportation, Deutsche Bank anticipates a 4% month-over-month increase in airfares and a 0.6% rise in other travel services prices, due to regulated rail fare increases. Moreover, the bank expects catering prices to rise by 0.5% month-over-month, with accommodation prices increasing by 3.4% due to hikes in the National Living Wage and employer National Insurance Contributions.
The bank's outlook for services inflation in March sees a 0.6% month-over-month increase for CPI and a 0.5% rise for RPI. The annual rate for CPI services inflation is anticipated to edge down slightly to 4.94% year-over-year, while RPI services inflation is expected to remain stable at 5.01%.
Looking ahead, Deutsche Bank has identified several disinflationary forces that have led to a reduction in their inflation projections. Adjustments to the Ofgem Price cap have led to a forecasted 7% contraction in dual fuel bills for the summer, with a 2% increase expected in October 2025.
Additionally, oil prices in sterling terms are down nearly 7.5%, and the bank has lowered its core goods inflation projections slightly, impacting items such as clothing, household goods, and leisure goods.
As a result, Deutsche Bank now sees core CPI running at approximately 3.6% year-over-year before slowing to just under 3% next year. For RPI, the bank has revised its projections down to 3% for this year and 3.2% for 2026.
The bank also notes potential downside risks to their projections, which could arise from a redirection of trade flows into the UK and weaker demand due to elevated trade uncertainty.