By Anna Dereka
After peaking at 11.1% in 2022, UK inflation has fallen to 2.6%, but questions remain over how this has been managed by the Labour government and whether it will last. Since March, the British economy has been on a path to a recovery, approaching the Bank of England’s 2% target for inflation. In the wake of the pandemic, the British economy has been shaped by a number of significant events, including energy price surges, domestic economic strategies enacted by the government, Russia’s invasion of Ukraine, and the beginning of Trump’s second term. Throughout this period, the UK successfully managed its domestic economy to reduce inflation, primarily through monetary policies such as increasing interest rates and quantitative tightening, while also deploying fiscal measures such as energy price guarantee and targeted cost-of-living support. As the policies begin to show positive outcomes, it is essential to assess the economy’s recovery process and examine the sustainability of the current inflation rate.
The Build-Up: Anatomy of the Crisis
2020: The inflation rate in 2020 was primarily influenced by a decrease in demand and lower energy prices due to the COVID–19 pandemic leading to a relatively low Consumer Price Index (CPI) averaging at 0.8%. The economic uncertainty led to households cutting spending on non-essential goods, weakening demand, with a further impact of lack of spending on travel and hospitality. Moreover, the COVID-19 pandemic contributed to the already existing consequences of the global oil prices collapse in early 2020, caused by an oil price war between Russia and Saudi Arabia, in which Russia refused to agree to reduced production, aiming to maintain the market share.
2021: After remaining below the Bank of England’s 2% target throughout 2020, it can be contended that the inflationary crisis began in 2021. During that year, the annual CPI inflation started to accelerate, rising from 0.7% at the beginning of the year to 5.4% by the end of the year. This was caused by a combination of post-Covid factors related to demand and supply chain. With the global economy ‘opening up’ after lockdowns, the demand for goods increased, putting pressure on the supply chain that struggled to keep up, hence driving the prices up.
2022: The primary driver of the UK’s inflation surge in 2022 (in addition to the aftermath of 2021) was Russia’s invasion of Ukraine, followed by an increase in energy prices. As the global energy market was disrupted, the prices of wholesale gas and electricity increased rapidly, harming the UK’s consumers through higher household energy bills. With the rate of inflation peaking at 11.1% in October 2022, it marked its highest level in over 4 decades, leading to decisive measures being taken.
2023-2024: As a result of successive interest rate adjustments by the Bank of England and the relative stabilization of global energy prices, inflation has moderated. However, assessing the durability of this trend and anticipating the Bank’s next policy moves requires a closer examination of the underlying economic indicators.
2025: According to official data, CPI fell from 2.8% in February 2025 to 2.6% in March 2025. The Office for National Statistics (ONS) has claimed that the change in inflation rate is associated with a fall in fuel prices, a drop in recreation and culture prices and changing food prices, contributing to easing the CPI. As stated by the ONS, the average price of petrol declined by 1.6 pence per litre between February and March 2025, reaching 137.5 pence per litre—down from 144.8 pence recorded in March 2024. Therefore, as a component of the CPI basket, lower fuel prices directly impacted transportation expenses and indirectly influenced the prices of goods and services across various sectors, easing the inflationary pressures.
The Calm Before Another Storm?
Though the inflation rate remains low, the Bank of England’s monetary policy committee expect inflation to rise again before the end of 2025: “Higher global energy costs and regulated price changes are expected to push up headline CPI inflation to 3.7% in 2025 Q3, even as underlying domestic inflationary pressures are expected to wane further”. A number of factors from global politics to the domestic economy can account for this – particularly the imposition of tariffs from the US and consistently high household bills domestically.
As of April 2025, the tariffs imposed by President Trump are exerting multifaceted pressures on the global economy, including potential risks to the UK’s economy and price changes. Following the announcement of taxes on goods imported to the US, some countries like China, have retaliated, leading to a significant 145% tariff rate on its goods exported to America. In the meantime, the UK is trying to negotiate, as a 10% tariff on goods and a 25% rate on imports of steel, aluminium and cars were imposed. With such tariffs, a change in prices will follow, particularly driven by cost-push inflation, resulting in the UK’s retailers and manufacturers passing the changes onto consumers. Though it is difficult to predict the exact effect of the tariffs alone, the price rise is most likely to be limited.
Additionally, the UK may be influenced by the tariffs indirectly as global trade dynamics are strained. With counter-tariffs used as retaliation by countries like China, the UK may be affected by the disruption of global supply chains that would push prices up. On the other hand, however, the sustainability of the current inflation rate may be shaken by what is known as ‘China’s dumping’. As the barriers to trade with the US increase, China may start selling goods cheaply in the UK, as an alternative market. This would decrease prices for goods and slow down the inflation rate. Therefore, the changing global dynamics lead to uncertainties facing the UK’s economy and particularly inflation. The global chain disruptions, retaliatory measures, along with China looking for alternative markets could create mixed effects on the inflation rate.
Domestic economic issues may also spell trouble for UK inflation. In April 2025, British households faced higher bills, particularly for energy, water, broadband, and transport. As the energy price cap has risen by 6.4%, an additional £111 was added to the average dual-fuel household bill. Moreover, there has been an increase in water bills in England and Wales, averaging £10 per month. These widespread increases in household expenses are anticipated to contribute to a rebound in inflation. Though the next set of inflation data is to be published in May, the increased costs faced by businesses may have already been reflected in higher consumer prices, as firms adjust their pricing strategies to offset rising operational expenditures.
Many economists now predict a marked acceleration in inflation due to increased household bills, potentially reversing the downward trend seen in the early months of 2025, and expect the prices to rise over 3%.Thus, the current inflation rate is likely to increase in the coming months due to rising household bills,and economic uncertainty, however, exact outcomes remain highly dependent on the policy direction of the Trump administration.
The Future of UK Interest Rates
As inflationary pressures ease and economic indicators show signs of a slowdown, the Bank of England may be expected to lower interest rates even further from the already reduced rate of 4.5% in February 2025, since the peak of 5.25% in August 2023.
By lowering interest rates in February, the Bank of England also revised down its economic growth forecast for the UK in 2025, anticipating that the economy would come close to entering a recession, while projecting inflation to climb back to 3.7% later in the year.
Looking ahead, the Bank of England’s policy decisions will depend on how inflation evolves relative to its 2% target and whether it continues to rise. If it does as projected – driven by Trump’s tariffs, global energy prices or household bills – the Bank of England may be forced to adopt a cautious approach, perhaps pausing the previous pattern of rate cuts. Conversely, should economic activity weaken, the Bank of England may implement further rate reductions to boost demand and increase economic growth, hence making borrowing cheaper.
While the fall in inflation to 2.6% in March marks the inflation crisis recovery since its peak of 11.1% in 2022, it is likely to be a temporary retreat rather than a long-term stabilisation. The unpredictable challenges like global energy costs and Trump’s protectionist policies are continuing to affect price stability and the potential outcomes of the recent tariffs on China for Britain are uncertain. In line with this, the Bank of England is managing its policy decisions on the basis of significant uncertainty and speculation about the global economy, aiming to balance keeping inflation close to the 2% target and stimulating a slowing economy. What is clear, however, is that the path to lasting stability will be neither smooth nor guaranteed. With new shocks always on the horizon, the calm of early 2025 may yet prove to be only a pause before another economic storm.
The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.
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