The UK’s annual inflation rate dropped to 2.6% in March 2025, according to the latest data from the Office for National Statistics (ONS), marking a continued easing of price pressures and sparking optimism about potential interest rate cuts.
This latest figure is a decrease from February’s 2.8% and sits just below the Bank of England’s forecast of 2.7%. It’s the lowest inflation rate recorded since October 2024, suggesting that the country may finally be emerging from the prolonged period of high inflation that followed the global energy crisis and pandemic-related supply chain disruptions.
Inflation Still Above Target
Despite the positive movement, inflation remains above the Bank of England’s official 2% target. The central bank has cautioned that inflation is likely to rise again later in the year, peaking at around 3.7% in the third quarter of 2025. This anticipated rise is largely attributed to increasing energy costs and upcoming hikes in regulated utility and transport tariffs.
Economic Outlook and Market Expectations
With inflation easing and recent labor market data showing signs of weakness—such as falling employment and a decline in job vacancies—financial markets are increasingly betting on a reduction in the Bank of England’s base interest rate. Many analysts now expect the Bank to cut the rate from 4.5% to 4.25% at its next policy meeting scheduled for May 8.
While wages have continued to grow at a solid pace, averaging a 5.9% increase in the three months to February, this has not been enough to offset broader concerns about slowing economic momentum.
Global Uncertainty Lingers
Adding to the cautious economic climate is a wave of global uncertainty. Recently announced U.S. tariffs under President Donald Trump’s administration have raised fears about their potential ripple effects on global trade and inflation. Economists warn that while the UK is currently seeing inflation ease, external shocks could once again put upward pressure on prices.
Looking Ahead
For households, the decline in inflation offers some relief after a prolonged squeeze on living standards. However, with inflation still above target and further energy price hikes on the horizon, the road to stable, sustainable price levels remains uncertain.
All eyes will now turn to the Bank of England’s May meeting, where policymakers will weigh the improving inflation data against ongoing risks to the economy.