Inflation: From too high to too low

After having been too high for the past three years, inflation in the UK will be too low for the next three years, and much lower than in the US and the euro-zone. Not only do we think that CPI inflation will fall from 3.4% in February to below the 2.0% target in April, but we also think it will drop to around 0.5% later this year and spend all of 2025 and 2026 below 2.0%. That’s why we think the Bank of England will cut interest rates from 5.25% to 3.00% by next year rather than to 3.75% as investors expect. What’s more, a further rebound in the economy’s supply capacity means this can all happen while GDP growth is stronger than widely expected.