UK inflation surprised to the downside in March, with the headline Consumer Price Index (CPI) falling to 2.6%—below both the previous month’s 2.8% and market expectations.
While financial markets and policymakers alike welcomed the inflation news, wealth managers remain cautious, pointing to significant challenges ahead that could limit any optimism.
According to the ONS, the largest downward pressures on inflation came from recreation and culture, alongside lower motor fuel prices. These helped offset persistent strength in services inflation, which remains elevated compared to pre-pandemic norms.
But while the headline figure may offer a moment of relief, wealth managers are being urged to keep a close eye on what’s ahead. April brought a wave of price hikes — from energy bills to council tax — which won’t be captured in the latest data. Meanwhile, global uncertainties, including the potential for further trade disruption driven by US tariffs, continue to cast a long shadow over the inflation outlook.
Markets have begun pricing in a rate cut from the Bank of England as early as May, and many believe monetary easing will follow throughout the year. Yet concerns remain about how far and how fast inflation may rise again, and whether rate-setters will act pre-emptively or wait for further clarity.
“A bigger than expected drop in headline inflation should be celebrated,” said Danni Hewson, Head of Financial Analysis at AJ Bell, “especially considering what households have had to deal with over the past few years.” But she warned the relief may be short-lived. “This month’s figures almost seem redundant considering all those price rises that set in at the start of April, expected to push inflation higher than any of us would like.”
Indeed, the onset of what Hewson calls “Awful April”—marked by hikes in energy costs, water bills, and council tax—is poised to place upward pressure on future prints, complicating the Bank of England’s (BoE) path forward.
Despite this, markets remain confident of a near-term rate cut. “At 2.6%, inflation is ahead of the Bank’s 2% target but sufficiently low to give rate setters the green light,” added Hewson, pointing to an 85% market-implied probability of a rate cut in May.
Sticky Services Inflation and Gilt Market Tensions
Nathaniel Casey, Investment Strategist at Evelyn Partners, underscored the persistence of inflationary pressures. “The UK continues to face stickier inflation than other advanced economies,” he noted. “Gilt yields remain significantly higher than those of German bunds, despite both economies grappling with weak growth.”
Services inflation, at 4.7% year-on-year, continues to pose the greatest concern—more than double pre-pandemic levels—while goods inflation remains muted at 0.6%. Casey noted that the outlook remains uncertain, particularly as President Trump’s newly reimposed tariffs could fuel inflation by raising import costs, even as softening oil prices offer some respite.
Tariff Tensions and Labour Market Watch
Quilter’s Lindsay James highlighted geopolitical uncertainty as a key risk. “Nobody quite knows what is going to happen next on President Trump’s tariff rollercoaster,” she said, noting that higher employer NICs in the UK could compound domestic inflation pressures. However, falling global energy prices—oil is down 15% year-to-date, and European gas down 25%—could act as a counterweight.
J.P. Morgan Asset Management’s Zara Nokes echoed those concerns: “Being a small and open economy leaves the UK exposed to such headwinds.” The real pressure, she said, will come if the labour market deteriorates following the NIC hikes—something that could tip the BoE toward more aggressive easing.
Rate Cut Expectations Firming for May
Luke Bartholomew, Deputy Chief Economist at abrdn, reinforced the growing consensus around a May rate cut. “An interest rate cut in May looks increasingly nailed on,” he said, adding that recent declines in energy prices and sterling strength could mean the inflation peak will be lower than the BoE’s 3.7% forecast.
This sentiment was echoed by Derrick Dunne, CEO of YOU Asset Management, who described the latest data as “a lifeline to the Bank of England.” While acknowledging the risk of a near-term inflation rebound, Dunne believes the economic backdrop may justify pre-emptive action.
A Temporary Lull Before Further Pressure
However, not everyone is ready to pop the champagne. Jeremy Batstone-Carr, European Strategist at Raymond James, called the March figures “little more than of historical interest,” given the inflationary pressures still in the pipeline from April’s utility hikes and potential tariff fallout. “UK CPI inflation is expected to increase to around 3.5% later in the year,” he cautioned, “limiting the scope for anything other than very gradual rate cuts.”
Still, David Morrison of Trade Nation struck a cautiously optimistic tone: “These are encouraging numbers and hopefully mark a return to the downward trend in inflation.”
The Bottom Line for Wealth Managers
The inflation story remains finely poised. While March’s data gives the BoE breathing space—and perhaps a nudge toward its first rate cut of 2025—the outlook is clouded by both domestic and global uncertainties. For wealth managers, the message is clear: stay nimble, monitor labour market signals, and watch the tariff drama unfold.
May’s MPC decision now looms large—and could set the tone for monetary policy in the second half of the year.
