Inflation in the United Kingdom was higher than expected in March, leading economists to think it may follow the US trend.
March inflation in the United Kingdom came in higher than expected, according to data published by the Office of National Statistics (ONS) on Wednesday. However, the drop still brings UK consumer prices to the lowest level in two years, falling from the 11.1% peak in October 2022.
UK inflation came in at 3.2% year-on-year against a 3.1% expectation by Reuters-polled analysts. Like most advanced central banks, the Bank of England sets its ideal inflation target at 2%.
In February, inflation had dropped more than predicted at 3.4%. With prices continuing their fall, UK government officials expect inflation to reach the target in the following months.
Core inflation, a figure excluding volatile goods like energy and food, came in at 4.2% against the 4.1% expectations. Inflation for services, the BOE’s favorite indicator for monetary policy, was also higher than forecast at 6%.
The BOE implemented a harsh monetary tightening to fight inflation. Interest rates were raised to 5.25%, leading to a slowdown of the overall economy. The UK officially entered a recession at the beginning of 2024.
The latest data, although worse than expected, still leads policymakers to believe a rate cut is coming. However, others think differently about the future of UK interest rates.
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US-style inflation
Inflation in the UK still remains significantly higher than the Eurozone’s. The bloc of 20 countries using the euro saw inflation dropping to 2.4% in March, far better than expected. And that is despite the Eurozone being hit harder by the energy crisis following the Russian invasion of Ukraine.
Many economists are therefore worried the UK may follow a similar path to the United States, whose inflation has dipped back up again in 2024. In March, US inflation rose to 3.5%, with economists expecting a stabilization at 3.4%.
US inflation data led Federal Reserve Chairman Jerome Powell to admit prices are taking “longer than expected” to reach target. That means the 20-year high 5.5% interest rates will not be cut any time soon.
A similar fate may hit the United Kingdom too, especially in the wake of Israel-Iran tensions and a possible rise in global oil prices. BNP Paribas is now questioning its June-cut prediction, saying it could come later.
That would be a political funeral for the UK Conservative Party, which is up for reelection sometime before January 2025. Polls show the next elections will lead to an overwhelming victory for the opposing Labour Party. Prime Minister Rishi Sunak is therefore trying to gather as many political points as possible, and a sticky inflation would certainly not go his way.
