UK inflation cooled more than expected in March but strategists warn of rebound

Investing.com -- U.K. inflation eased more than expected in March, largely due to a drop in petrol prices, according to new figures from the Office for National Statistics (ONS).

Annual inflation slowed to 2.6%, down from 2.8% in February, offering some relief to consumers after years of high price growth. But analysts warn the decline may be short-lived, with energy bills and rising business costs likely to push inflation higher again from April.

“U.K. headline inflation was lower than expected in March, but higher contributions from household energy and water bills will help take it to 3.5% or above in the second half of the year,” ING strategists said in a note.

Simultaneously, services inflation is expected to come lower imminently, helping reinforce the Bank of England’s (BoE) case for quarterly rate cuts, strategists added.

Petrol prices played a key role in March’s slowdown, with the average cost falling 1.6p to 137.5p per litre. A decrease in the cost of recreational goods, including a sharp drop in prices for toys, games, and hobbies, also helped ease overall inflation.

Despite prices still rising, the data suggests the pace of increase is continuing to moderate. Inflation has pulled back significantly from the highs seen in recent years.

Meanwhile, wage growth continues to exceed the rate of inflation. Public sector workers, in particular, are seeing stronger pay gains than their private sector counterparts.

According to ONS data published earlier this week, average earnings increased by 5.9%.

Ruth Gregory, Deputy Chief U.K. economist at Capital Economics, also believes the U.K. inflation will rebound to around 3.5% in the coming months.

However, he thinks that “a weak economy will quash inflation eventually and that the tariff shock has tilted the balance of risks towards lower inflation and faster falls in interest rates.”

Gregory forecasts domestic inflation to ease due to a weak economy and is increasingly concerned about the disinflationary impact of U.S. tariffs.

While the economist maintains the forecast for inflation to gradually decline to 2.0% by 2026, he notes that the risks to this outlook are increasingly tilted to the downside.

Regarding the response from policymakers, Bank of America believes the BoE will cut rates in May, adding that risks for a faster cutting cycle than its base case of quarterly cuts are rising.