UK inflation figures released today indicate a slight easing, with the Consumer Prices Index (CPI) rising by 2.8% in the 12 months to February 2025, down from 3.0% in January. This drop, albeit marginal, has brought some relief to policymakers and investors alike, especially as Finance Minister Rachel Reeves prepares to present her fiscal strategy during the Spring Statement later today.
The latest data from the Office for National Statistics (ONS) shows that the CPIH, which includes owner-occupiers' housing costs, rose by 3.7% over the same period, a decrease from 3.9% in January. On a monthly basis, both CPI and CPIH recorded a 0.4% rise in February 2025, contrasting with a 0.6% increase in February 2024.
Notably, the largest downward contributions to the monthly change in both CPIH and CPI came from clothing and footwear costs, which fell by 0.6% in the 12 months leading to February 2025. This marks the first negative annual rate for clothing since October 2021, reflecting changing consumer behavior and economic pressures.
“The largest downward contributions came from clothing and footwear, housing and household services, and recreation and culture,” the ONS reported, highlighting the areas where consumers are feeling the pinch. While the overall inflation rate has eased, concerns linger about the potential for rising energy prices and tax increases to push rates back up towards 4% later this year.
Market analysts had anticipated a slightly higher CPI growth of 2.9%, making the actual figure somewhat of a surprise. “The chancellor will be relieved to see inflation come in a little lower than expected for February, although others may see it as reflecting weaker economic growth,” commented Neil Birrell, chief investment officer at Premier Miton Investors.
As the inflation data was released, the pound fell by 0.3% to $1.2908, while yields on two-year gilts dropped by 6 basis points to 4.243%. This decline in bond yields reflects a market response to the inflation figures, as traders recalibrate their expectations regarding future interest rate cuts by the Bank of England.
At its latest meeting, the Bank of England's Monetary Policy Committee voted by a majority of eight-to-one to maintain interest rates at 4.5%. However, interest rate swaps data now indicates a 77% chance of a rate cut at the Bank’s May meeting, with a further 55.6% probability of another cut in August 2025. If these cuts materialize, they would likely leave UK interest rates at around 4.0%.
Looking ahead, the Chancellor’s Spring Statement is expected to outline significant spending cuts aimed at balancing day-to-day spending with tax revenues by the end of the decade. Analysts predict that the government will need to issue around £304 billion in bonds for the 2025/26 fiscal year, the second highest on record, following the pandemic-driven issuance of 2020/21.
“On the size of the remit, £300 billion is the crucial number,” said Ales Koutny, head of international rates at Vanguard. “Much above or below it and markets will react accordingly.” The upcoming Spring Statement is set to be a pivotal moment for the government as it seeks to navigate the complex economic landscape.
Despite the easing inflation, there are concerns that the UK economy is not out of the woods yet. Recent data indicated that the gross domestic product (GDP) shrank by 0.1% in January 2025, against expectations of a 0.1% rise. The Office for Budget Responsibility is also likely to revise down its growth forecasts, previously predicting a 2% GDP expansion for 2025.
In the face of these economic challenges, the Bank of England’s decisions regarding interest rates will be closely monitored by traders and investors. The geopolitical landscape, particularly the ongoing situation with tariffs and trade policies, continues to add uncertainty to the economic outlook.
As the Bank prepares for its next quarterly monetary policy report on May 8, the implications of today’s inflation data will be a key consideration in shaping future monetary policy. For now, the UK government and its financial institutions brace for a challenging period ahead, with inflationary pressures still looming large.
In summary, while the recent inflation figures provide a momentary reprieve for the UK economy, the road ahead remains fraught with uncertainty as policymakers grapple with rising costs and economic growth challenges. The Spring Statement will be a critical juncture, determining how the government plans to address these ongoing issues and restore confidence in the economy.
