Katie Williams
Inflation in February unexpectedly slowed to 2.8% after a surprise jump to 3% in January, but expectations of a spike towards the end of the year are still lingering.
The headline figure of inflation (as measured by the Consumer Prices Index) is expected to hit around 3.75% in the third quarter of 2025, according to the latest forecast from the Bank of England.
Global energy prices will be a significant factor driving the increases, the central bank said, noting that although prices have fallen recently, they are still higher than last year. The Ofgem energy price cap is set to soar by 6.4% in April, on top of a rise of 1.2% last January.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
A brief respite may be offered in the summer, however, as energy consultancy Cornwall Insight, who are well regarded for their price cap predictions, think energy prices will fall by around 5%.
Other factors that could add inflationary pressure to the UK economy include global trade policy uncertainty, especially around US President Donald Trump’s implementation of tariffs, that are adding to global financial uncertainty.
The minutes of the Monetary Policy Committee mentioned: "Since the MPC’s February meeting, there had been a further increase in geopolitical and global trade policy uncertainty, and it was likely that this elevated uncertainty would persist."
As a result, "the Committee judged that the consequent risks around the near-term outlook for activity in a number of advanced economies, including the United Kingdom, remained to the downside”.
It’s not all bad news. In keeping with its statements in February, the last time the MPC met, the central bank still believes domestic inflationary pressures will wane by early 2026, when they predict inflation to return to the 2% target.
This being said, a return to the 2% target as predicted by the central bank is still a year away, offering little solace for consumers struggling with rising prices in the meantime.
The present consensus among analysts and policymakers is that the fall in inflation in February will not be reflected in subsequent months. Instead, they believe the rate of inflation will increase as the year progresses.
Scott Gardner, investment strategist at wealth manager Nutmeg, warns that the latest data represents just “a momentary reprieve for UK consumers”.
“Some might see this as the calm before the storm after several forecasts have suggested that inflation could move closer to 4% over the course of 2025.”
Gardner highlights an upward trend in manufacturing PMI prices, as well as flat services inflation. “Likewise, weekly food shops were impacted by a further increase in checkout prices; meanwhile motorists saw a year-on year fall in the cost of petrol.”
The full effects of measures announced in the Autumn Budget will also start to be felt as the year progresses. The chancellor’s controversial decision to raise both employers’ National Insurance contributions and the National Living Wage could bring about upwards inflationary pressure.
This is because, once they become implemented from April onwards, many firms will choose to pass the increased costs on to consumers. As many as 54 percent of businesses are planning to hike their prices in an attempt to offset these costs, according to a survey from the British Chambers of Commerce.
It means inflation looks likely to rise throughout the rest of the year, as prices are pushed up by higher labour costs.
If inflation is set to rise, why is the Bank of England lowering interest rates?
Inflation rising above the 2% target is always a cause for concern for economists, policymakers, and consumers.
Policymakers at the Bank of England will be particularly concerned about inflation figures as it is the one of the jobs of monetary policy to guide and control inflation so that prices do not spiral out of control. This is largely done through influencing interest rates – they are typically raised to fight inflation.
Despite inflation being forecast to rise to around 3.75% by the end of the year, the Bank of England has been gradually cutting rates since the summer of 2024, and maintained them at 4.5% in the most recent meeting of the MPC in March 2025.
Some commentators have argued that this pivot towards a more dovish approach reflects growing concerns about stagnation in the UK economy, with growth becoming more of a worry than inflation. Lowering interest rates incentivises more spending in the economy, which drives growth.
Coinciding with measures announced in Rachel Reeves’ Spring Statement, the Office for Budget Responsibility halved its economic growth predictions from 2% to 1% for 2025, though it is worth noting that they increased it for subsequent years.
The OBR now forecasts the UK economy to grow by 1.9% in 2026, 1.8% in 2027, 1.7% in 2028, and 1.8% in 2029.
The latest UK GDP report showed zero growth in the three months to November (versus the three months before).
Alternatively, the MPC might simply be less worried about the upcoming rise in inflation because it is being driven by global rather than domestic pressures. In its February report, the Bank wrote: “The MPC judges that this pickup in headline inflation will not lead to additional second-round effects on underlying domestic inflationary pressures.”
Indeed, services inflation has been a big area of focus for the Bank of England in recent months. It has consistently stayed at around 5% (though it briefly fell to 4.4% in December 2024), which is a cause for concern given that services account for around 80% of the UK economy.
Despite high services inflation, February’s overall fall in inflation indicated that the Bank of England still seems to be on course to cut rates, with financial markets pricing in 55% chance of the MPC lowering the base rate to 4.25% at their next meeting on 8 May.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: “inflation is likely to rise from here, so [February’s fall in CPI is] unlikely to mean a radical rethink by the Bank of England.
“It has already pledged to stay cautious on cuts in the coming months, and it’s going to stick with the plan. GDP data will also be fresh in its mind, and the fact the economy shrank in January.
“The Bank won’t want to keep rates too high for so long that growth stagnates entirely. On balance we’re expecting a rate cut in May or June, and a second around September.”
Overall, the Bank of England still seems set on reducing the base rate because they are still firm in their belief that disinflationary forces will drive down prices by early 2026.
While the prospect of inflation jumping to 3.75% in the winter is daunting, especially as household bills increase in April, the overall economic environment seems to be indicating that inflation will go back to the 3% target.
-
Which UK region has the most in savings? Average savings by areaThe amount people have in their savings differs from region to region in the UK. How does your nest egg compare to those living nearby?
-
Doug and Mary Perkins: Specsavers’ clear-sighted foundersHelped by the deregulation of the sector in the 1980s and brilliant advertising, Mary Perkins and her husband Doug have taken Specsavers to the top of the optometry market
