Gabriella Dickens, G7 economist at AXA Investment Managers, comments on the UK’s June growth data.
After softer labour market data in the past week, the inflation releases also undershot expectations, paving the way for a 25bps cut at the BoE’s next meeting in May. Indeed, the headline CPI inflation rate fell to 2.6% in March, from 2.8% in February, below both market and the Bank of England (BoE) expectations of a fall to 2.7%. One of the main drags stemmed from the recent drop in oil prices, with motor fuels knocking 0.15 percentage points (ppts) off the headline rate. But more broadly, services CPI inflation slowed to 4.7%, from 5.0% – 10bps below expectations – which helped drag core inflation down to 3.4%, from 3.5%.
Digging deeper, the slowdown in services inflation was fairly broad-based, with recreation & culture, and restaurants & hotels knocking 0.14ppts and 0.07ppts off the headline rate, respectively. The drop in the former largely reflected relatively small downward effects from a variety of sub-categories, while the slowdown in restaurant & hotel CPI inflation to 3.0% in March marked its slowest pace since July 2021. Rental inflation also continued to slow, dropping to a six-month low of 7.2%, from 7.4%, and this trend looks set to continue, as signalled by the sharp decline in the Royal Institution of Chartered Surveyors’ (RICS) Rental Expectations balance over the past year or so. Airfares, meanwhile, were weak, dropping by 0.5% on the month, which looks set to reverse in April, given that index day will fall within the timeframe of Easter.
On the goods side, there were both upside and downside impacts. The main boost to the headline rate came from clothing prices which rose by 2.3% on the month in March 2025, compared to just 0.6% in 2024, pushing up the inflation rate to 1.1%, from -0.6% in February. But a large part of that was payback, as stores extended their sale period further into February than usual. Food CPI inflation, meanwhile, surprised to the downside, dropping to 3.0%, from 3.3% in February. We now see it peaking at a tad below 4%, rather than above, as we had previously expected.
Taking a step back, the slowdown in food CPI inflation combined with core goods inflation remaining unchanged at 1.1% also stands the BoE in good stead to continue its gradual cutting process, given that it had previously noted that the strength in goods prices running into 2025 may have reflected higher labour costs. On balance, this was a dovish print, and all but confirms a May cut. And with energy prices dropping again in April, we think the Bank of England will revise down its CPI inflation outlook in the accompanying Monetary Policy Report, perhaps to a peak of around 3.2%, from 3.7% previously.
But the Bank’s messaging likely will continue along a cautious line, with policymakers highlighting the uncertainty around the path for inflation given both upside and downside risks in the wake of the US tariff policy changes. In our eyes, though, the likely slowdown in global growth crossed with the already deteriorating labour market and increasing likelihood of some product dumping points to growing risks of inflation undershoots in the medium term. We think the Bank will cut by three further times this year, but then will continue to cut into early 2026, leaving Bank Rate at 3.25% by end-2026.
