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Inflation eases back to 2.5% putting May rate rise in doubt

Paloma Kubiak
Written By:
Paloma Kubiak

The UK rate of inflation fell back by more than expected in March, helping to reduce the financial pressures on households and making a May rate rise less likely.

The Consumer Price Index (CPI) came in at 2.5% for March, having eased back from the 2.7% recorded in February. This is the lowest rate for a year, and closer to the 2% inflation rate target.

Clothing and footwear contributed to the downward trend, as did alcoholic drinks and tobacco which increased in price more slowly in March than they did a year ago.

Given yesterday’s wage growth data, coupled with today’s inflation rate figures, it means the Bank of England is less likely to raise interest rates next month.

Markets had priced in an 85% chance of a Bank base rate rise in May, but Ben Brettell, senior economist at Hargreaves Lansdown, said:  “Traders had been betting on an interest rate rise next month from the Bank of England, and while this still looks the most likely outcome, the absence of inflationary pressure lessens the onus on the Bank to act immediately.”

Brettell added that the interplay between wages and prices will be interesting over the coming months.

“Inflation looks to be falling back as predicted, but with wages picking up and unemployment still falling, it’s possible this tightness in the labour market could eventually push inflation back up.

“Higher wages mean more money chasing the same amount of goods and services, which could lead to higher prices. At the same time firms might choose to pass on higher staff costs to the end consumer. It’s this wage-price spiral which underlines the case for higher interest rates. Remember the Bank of England is targeting inflation in two years’ time, not today.”

The Office for National Statistics (ONS) also revealed that the Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.3% in March 2018, down from 2.5% in February 2018.