UK inflation falls below rate in US

UK inflation has fallen to its lowest level since September 2021 and, for the first time in two years, dropped below rates in America.

According to ONS stats released today, CPI inflation slowed to 3.2 per cent in March, down from 3.4 per cent the month before. Core inflation – which strips out volatile energy and food prices – fell to 4.2 per cent in March from 4.5 per cent in February. 

There is a slight caveat to this encouraging data. These drops were smaller than forecast. CPI and core inflation had been expected to drop to 3.1 and 4.1 per cent respectively. The fall in food prices last month was offset by a rise in the cost of fuel. 

Even so, the situation is far improved compared to a year ago when especially sticky inflation in the UK was beginning to make Britain look like a global outlier. 

In late June 2023, as I wrote in Reaction at the time, things were looking especially dire. UK headline inflation, coming in at 8.7 per cent, was the highest among G7 economies. And the latest release of monthly data confirmed that this figure had, once again, refused to budge. 

At the time, Britain’s central bankers must have envied their American counterparts who appeared to be storming ahead in their battle to tame the inflationary beast, with the US headline rate running at 4 per cent. 

A year on, a different picture is emerging. While UK and Eurozone inflation is continuing to fall steadily, it is proving stickier across the Atlantic. 

The rate of US inflation actually rose last month, according to last week’s data, spooking markets and prompting fears of a delay to interest rate cuts in the US and elsewhere. 

Fed chairman Jerome Powell stoked these fears today, at least for those inside America. Powell insisted that the Fed would need greater confidence that inflation is moving sustainably towards its 2 per cent target before it started cutting rates, adding that, “the recent data has clearly not given us greater confidence”.

Yet central bankers on this side of the Atlantic appear undeterred so far by the Fed – and are indicating that they could press on ahead with rate cuts without it. 

President of the European Central Bank (ECB), Christine Lagarde, has twice hinted in recent days that the ECB is still planning on imposing a cut as early as June. 

And Bank of England boss, Andrew Bailey, appears confident too about the possibility of diverging from the Fed. 

Speaking at the IMF event in Washington last night, Bailey insisted that there is “strong evidence” of price pressures easing up in the UK, adding that, “the dynamics for inflation are rather different now between Europe — I mean Europe geographically now — and in the US. 

So when can we expect UK borrowing rates currently languishing at their 16-year high – of 5.25 per cent – to start coming down? 

It’s not entirely clear. Bailey’s confidence hasn’t quite translated into market confidence. 

Today’s smaller-than-expected fall in inflation – paired with a gloomier US outlook – means markets are offering more cautious predictions about the likely pace of rate cuts. 

Last week, many investors were factoring in a first cut in August. Now, the expectation is increasingly skewed towards a first cut in September, with the gloomier forecasts predicting it could come in November. After April’s inflation data, there is likely to be a clearer consensus. 

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