UK Inflation Eases Slightly in February

Inflation edged down slightly in February but remained well above the Bank of England’s target, likely keeping policymakers cautious as they consider further interest rate cuts. Consumer prices were 2.8% higher in February compared to a year earlier, down from a 3% annual inflation rate in January, according to data released on Wednesday (March 26, 2025) by the UK’s statistical office. This small decrease in inflation came slightly sooner than economists had anticipated and was attributed to a more moderate rise in energy prices and goods such as clothing and footwear. The February annual inflation rate was still the second-highest since March of last year, highlighting the ongoing price pressures burdening the British economy. The Bank of England (BOE) targets an optimal annual rate of 2%. Prices for services, a key focus for BOE policymakers, rose by 5.0%, unchanged from the previous month, while core inflation—which excludes volatile food and energy prices—fell to 3.5%. This decline is unlikely to derail the Bank of England’s recent strategy shift towards lowering interest rates, said Joe Nellis, economic advisor at consultancy firm MHA. ‘While international uncertainty due to the trade war led by U.S. President Trump has contributed, sticky inflation is now driven by domestic economic actions,’ Nellis noted in a statement. Last week, the BOE decided to keep interest rates steady, aligning with the Federal Reserve’s decision a day earlier. Policymakers stated they would remain ‘cautious and vigilant’ when examining further rate cuts, having reduced borrowing costs more slowly than their European counterparts. BOE Governor Andrew Bailey stated during last week’s meeting that interest rates are expected to continue on a gradual downward trend. The BOE anticipates annual inflation will continue to rise, reaching 3.7% before the end of the first half of the year due to higher energy prices. As of April 1st, household energy prices are set to increase by 6.4%, following a January hike. However, global energy prices have recently dropped sharply. If household energy charges in the UK fall below BOE forecasts in the second half of the year, the annual inflation rate could begin to ease toward the 2% target sooner than expected.