UK inflation data for March came in hotter than forecast, with the Consumer Price Index (CPI) rising to 4.7% year-on-year, up from 4.2% in February. The figure overshot economists’ consensus expectations of around 4.3%, raising questions about the Bank of England’s monetary policy path and further complicating the outlook for interest rate cuts.

Energy tariffs, food prices, and core services were the largest contributors to the March inflation increase. A revised energy price cap—while lower than last year—still reflects elevated wholesale costs that energy providers are now passing through. Additionally, stubborn cost pressures in hospitality, transport, and insurance suggest limited progress on services inflation, which remains above 6%.

Core inflation, which excludes food and energy, held firm at 5.6%, indicating entrenched pricing momentum in non-volatile sectors. The data suggests that price stickiness, especially in labor-intensive industries, is proving more resilient than previously assumed.

Markets reacted by pushing back expectations for rate cuts. Traders in short-term interest rate futures now anticipate the first Bank of England rate reduction may not come until Q3 2024 rather than earlier in the summer. The pound gained modestly on the news, while UK gilt yields rose as bond investors recalibrated their inflation forecasts.

Policymakers at the Bank of England have maintained a cautious tone. Governor Andrew Bailey has stressed the need for “clear evidence” of sustained disinflation before policy easing begins. The Monetary Policy Committee’s next meeting will face added pressure, with some members likely to argue for a more extended hold on the current 5.25% base rate.

The inflation print also has political consequences, with households still struggling under persistent cost-of-living pressures. Retailers are warning of weakened demand recovery, and mortgage holders face further strain as high borrowing costs remain longer than anticipated.

Downward revisions to the inflation trajectory now look unlikely in the near term unless wage growth cools significantly or external price shocks subside. The current data reinforces the view that the UK’s path to the Bank’s 2% inflation target will be slower and more volatile than previously projected.