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16 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Inflation fell again in March, but a sharp rebound is likely

Consumer Price Index (CPI) inflation fell in March, dragged down by base effects in the services category and lower fuel prices. Inflation will likely rebound in April's data as major increases in regulated prices take effect and businesses raise prices in response to higher labour costs. We think inflation will peak in the autumn before cooling, as the contribution from the energy category fades.
Today's data keeps the Monetary Policy Committee (MPC) on track to deliver another 25bps cut at its May meeting. Further ahead, recent US tariff announcements point to a softer demand outlook, but the MPC's concerns about persistent supply weakness will likely convince it to maintain a cautious approach to loosening policy.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “CPI inflation fell to 2.6% in March, from 2.8% in February. The decline was partly driven by strong base effects in the services category. Meanwhile, a decline in oil prices also meant petrol prices fell 1.1% month-on-month between February and March, compared to a 1.8% rise between those months last year. These factors were more than enough to offset the unwinding of February's weakness in the volatile clothing sub-category.

“A sharp pickup in inflation from April is all but guaranteed. Ofgem's 6.4% increase to its price cap, after a large fall last year, means we expect the energy component will add 0.7ppts to CPI inflation in April. A significant increase in water bills means the contribution from the core goods category is also set to rise. In addition, we expect businesses to pass on some of the increase in labour costs caused by the recent rises in employers' National Insurance Contributions (NICs) and the National Living Wage onto consumers. Inflation is likely to peak in the autumn, before starting to cool as the contribution from the energy category fades.

“The MPC has lowered Bank Rate at alternate meetings since its cutting cycle began last summer. With MPC members highlighting the substantial uncertainty associated with the potential inflationary impact of US tariff increases, and the large time lag before the committee sees hard data on how the NICs and National Living Wage rises are playing out, we think the MPC will be content with sticking to its cut-hold tempo for the time being. We expect the next rate cut to come at the MPC’s May meeting.”

15 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Labour market poses challenge for MPC

Strong pay growth and signs that UK labour market conditions are only gradually easing continue to present the Monetary Policy Committee (MPC) with a headache. But over the course of this year, the effect of US tariffs on demand will likely see the labour market loosen further.
The MPC remains unlikely to give a clear indication around the pace or extent of interest rate cuts as it balances the prospect of weaker GDP growth against a labour market that continues to generate strong pay growth. We expect the MPC to cut Bank Rate by 25bps in May.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Having picked up towards the end of last year, pay growth remained elevated over the three months to February. Regular pay growth across the whole economy ticked up by 0.1ppt to 5.9%, while private sector earnings growth was unchanged at 5.9%. Although pay growth has levelled off in recent months, it remains far above the rates consistent with 2% inflation, with momentum in pay growth still strong.

“The unemployment rate was unchanged at 4.4% across December to February, but continued issues around data reliability mean this reading should be taken with a pinch of salt. Other indicators suggest that, having loosened over most of last year, the labour market softened slightly further at the start of this year. Payrolled employee numbers declined over the three months to February, while job openings nudged down too. The large increase in US tariffs and the associated policy uncertainty will likely see UK GDP growth slow and unemployment rise over the rest of this year.

“Today's data will not do anything to help the MPC give a clear indication around the rate or extent of future Bank Rate cuts. We think it will continue to adjust interest rates slowly as it monitors how the impact of US tariffs and increases in the National Living Wage and employers' National Insurance Contributions (NICs) filter through to the jobs market and inflation. We expect the Bank of England will cut again in May, and the August meeting looks pivotal as it will represent the first chance for the MPC to give a fuller assessment of the impact of these significant shifts.”

11 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

February’s rise in GDP overstates underlying strength

GDP picked up substantially in February, but the data appears to overstate the UK's true performance and continues to be affected by residual seasonality.
Despite the significant pickup in activity, growth will likely slow from here. US tariffs will directly affect UK exports, while a weaker global economy and more domestic caution will also prove headwinds to growth. The lagged impact of past interest rate rises and tighter fiscal policy will also weigh on economic progress this year.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “GDP picked up substantially in February, growing 0.5% month-on-month on the back of a flat reading in January. February saw strong growth in all the main sectors, while within the services sector, consumer-facing services picked up by 0.7%. However, it was very apparent that the biggest gains came from those sectors that fell most in January.

“Having ground to a halt in the second half of last year, the recent GDP data points to building momentum, with activity growing 0.6% across the three months to February. But this likely overstates the true strength of the UK economy and instead reflects ongoing issues with how the GDP data accounts for shifting seasonal patterns. In recent years, the Office for National Statistics (ONS) has repeatedly estimated that GDP growth was strong at the start of the year, only for that strength to fade into the latter half. The monthly pattern of output so far in 2025 is closely tracking last year’s sequence.

“Even abstracting from data quality issues, we expect UK GDP growth to slow from here. Following US tariff announcements, the UK's export sector will feel the direct effects from reduced access to a key market. But the indirect impact on UK trade from a weaker global economy will be just as important. Domestically, more uncertainty will weigh on consumer spending and businesses' capital expenditure decisions. With a cautious Monetary Policy Committee (MPC) likely to proceed with careful interest rate cuts, the impact of past rate rises still to be felt by some households, and fiscal policy tightening significantly, the UK growth outlook remains very challenging.”

07 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Stamp duty changes could lead to slower activity in the housing market

House prices fell slightly further in March as the market continued to cool ahead of the change in stamp duty thresholds. Nonetheless, even with mortgage rates increasing in recent months, the market remains resilient with prices 2.8% higher than they were 12 months ago.
The housing market will likely go through a temporary period of slower activity now that the stamp duty thresholds have returned to normal. It is expected to then recover very gradually as interest rates fall slowly, housing affordability remains stretched and uncertainty over the economic outlook causes some major purchase decisions to be postponed.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices fell by 0.5% in March, on the back of a 0.2% decline in February, as demand softened following the January rush to make sure transactions were completed ahead of the change in stamp duty thresholds. Despite the small falls in the last two months, the resilience of the housing market during the second half of last year means that prices are 2.8% higher than 12 months ago and remain close to record highs. 

“Through the turn of the year, the housing market remained solid despite mortgage rates drifting up as home buyers looked to complete their moves before the stamp duty thresholds returned to normal at the end of March. But with the change now in place, this temporary tailwind is behind us. With some house purchases having been brought forward from the middle of the year, the housing market is expected to take a pause for breath over the next couple of months.

“After what is likely to be a period of slower activity over the coming months, the housing market may only see a very gradual improvement over the rest of the year. Interest rates will slowly fall back, but housing valuations are stretched, so affordability will likely remain challenging. In addition, some buyers may decide to hold off making major purchase decisions amid ongoing macroeconomic and geopolitical uncertainty.”

01 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

March slowdown could signal a challenging few months for the housing market

House prices remained unchanged in March as the support from lower Stamp Duty thresholds faded. But looking back over the last twelve months, house price growth has remained resilient in the face of stretched valuations, increasing by 3.9%.
With Stamp Duty thresholds now back to normal, the next couple of months might be challenging for the housing market. But with interest rates likely to fall gradually over the course of this year, the housing market is still likely to improve modestly.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “House prices were unchanged in March having grown by 0.4% month-on-month in February. But from month-to-month, house prices can be volatile. Looking over the course of the last twelve months, house price growth has shown continued resilience, increasing by 3.9% year-on-year to March as mortgage rates have declined from last year’s highs and a temporary reduction in Stamp Duty thresholds has supported demand of late.

 “Through most of the first quarter, the housing market held up well despite the recent rise in fixed-term mortgage rates as home movers looked to complete their purchases before stamp duty thresholds returned to normal at the end of March. But with this temporary tailwind now behind it, the near-term outlook for the housing market will prove more challenging. Demand will likely be a little softer as some house purchases will have been brought forward from the middle of the year, while mortgage rates remain elevated and housing affordability is stretched. 

 “Nonetheless, after a temporary soft patch over the next couple of months as the effects of the change in stamp duty play out, conditions are likely to still be in place to drive a modest improvement in the housing market over the rest of 2025 as interest rates fall slowly.”

01 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Manufacturing sector continues to face significant challenges

The UK's struggling manufacturing sector saw activity slip further in March as the possibility of future tariffs and a difficult domestic backdrop continued to have an impact. While some of the recent decline in the Purchasing Managers’ Index (PMI) likely reflects business sentiment rather than activity, the outlook for the manufacturing sector remains challenging.
The manufacturing sector is a prime example of the challenge facing the Bank of England. Both domestic and global headwinds are seeing manufacturers reduce headcount, while continued cost pressures are being passed onto the consumer.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “March's final manufacturing PMI survey reported another significant decline in activity, falling to 44.9 in March, down from 46.9 in February. Concerns over possible future tariffs and challenging domestic conditions pushed the PMI to a 17-month low.

 “The S&P Global manufacturing PMI has a poor track record of predicting official estimates of manufacturing performance, as it has tended to be influenced by sentiment rather than true shifts in activity. But while today's fall in the PMI may be too dramatic, it's hard to deny the sector continues to face some significant challenges. US tariffs on goods imports from the UK could rise tomorrow, with survey respondents indicating that the possibility of higher tariffs is already weighing on demand for exported goods. While at home, interest rates will only fall slowly, and businesses will have to contend with higher labour costs due to the rises in the National Living Wage and employers' National Insurance Contributions (NICs).

 “The manufacturing sector remains a good example of the dilemma facing the Bank of England. Manufacturers are passing some of the cost uplift from higher NICs and National Living Wage rises through to the consumer, putting pressure on prices. Meanwhile, the prospect of US tariffs and weak domestic demand is seeing the sector cut jobs. In the face of this trade off, we expect the Bank of England to continue cutting interest rates gradually until at least the summer, at which point they will have more information on how the economy is responding to these changes.”“Overall, we expect steady rather than spectacular GDP growth this year. While easing consumer caution will help to support growth, uncertainty around business prospects will likely hamper how much businesses are willing to spend. The stop gap Spring Statement didn’t move the needle on fiscal policy, which will likely continue to tighten, and past interest rate rises will continue to weigh on disposable incomes as many households refinance their mortgages.”

28 Mar 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Temporary GDP slowdown in second half of 2024 confirmed

Today's UK GDP data confirms that growth slowed significantly in the second half of last year, despite growth across 2024 being revised up. The H2 2024 slowdown likely reflects some of the ongoing issues with the Office for National Statistics (ONS) data. Early indicators of Q1 2025 growth suggest activity picked up in the first quarter.
GDP growth looks set to be steady rather than spectacular across 2025. Easing consumer caution will boost demand, but tighter fiscal policy and the delayed impacts of past interest rate rises will remain headwinds to growth.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Today's GDP data confirms that the UK’s economy almost ground to a halt in the latter half of last year, with quarter-on-quarter growth of 0.1% in Q4 – slightly higher than Q3's flat reading. The expenditure split was equally as downbeat, showing a slowdown in private demand in the final quarter of last year. Upward revisions to GDP in H1 magnified the contrast with H2. However, residual seasonality in the growth estimates leaves a question mark over the slowdown, given there has been a loss of momentum in Q3 in each of the past three years. Monthly data suggests that GDP growth has picked up in the first quarter of this year.

“Consumer caution continued into the final quarter of 2024 as households saved rather than spent decent real income gains. Households' saving ratio increased to 12% – comfortably higher than the pre-pandemic average. Given the high starting point, we believe there is still space for households to maintain spending by saving less, even as pay growth cools and inflation rises over the rest of this year.

“Overall, we expect steady rather than spectacular GDP growth this year. While easing consumer caution will help to support growth, uncertainty around business prospects will likely hamper how much businesses are willing to spend. The stop gap Spring Statement didn’t move the needle on fiscal policy, which will likely continue to tighten, and past interest rate rises will continue to weigh on disposable incomes as many households refinance their mortgages.”

28 Mar 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

February’s retail data consolidated January’s rebound in sales

February delivered a second successive large monthly rise in UK retail sales, with an increase in non-food sales the main driver. But we see the upturn as being indicative of noisy data rather than evidence of a strong improvement in retailing performance.
A recovery in household confidence is likely to be a key source of support for the retail sector this year. However, any pickup in consumer spending growth will likely be relatively modest given the backdrop of weaker real income growth, tighter fiscal policy, and the lagged impact of earlier interest rate rises.

Matt Swannell, Chief Economic Advisor to the EY ITEM Club, said: “Building on January's gains, retail sales volumes rose a further 1% month-on-month in February. Fortunes varied significantly at the sectoral level, with non-food sales rising substantially, while there were also stronger readings for fuel and non-store sales. This was more than enough to offset a fall in sales at food stores, as January's uptick unwound.

“The exceptional volatility in recent retail sales outturns has made it difficult to identify underlying trends. In each of the past two years, sales in food stores have slumped in December, risen markedly in January, then fallen back again in February. Sales figures for non-food stores have also been exceptionally volatile in recent months. We suspect this reflects a combination of seasonal adjustment problems and the fact that retail sales data can be very noisy. It appears unlikely that the recent strength is indicative of a strong improvement in the underlying performance of the sector, and we expect sales to fall back in the coming months.

“Looking through this volatility, we only expect a modest improvement in retailing performance this year. Firming household confidence should support a slight acceleration in consumer spending growth. However, it is difficult to envisage a much stronger pickup in 2025 given the headwinds from weaker real income growth, tighter fiscal policy, and the lagged effects of past interest rate rises.”

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY Comments on Minding the gap

No tax policy announcements but a wealth of tax administration

“Even with no major tax policy announcements in today’s Spring Statement, many businesses will still feel the pinch when measures such as the increase to employer National Insurance contributions announced at the Autumn Budget come into effect next month.

“At the same time, the ongoing unsettled economic and geopolitical environment means many businesses in the UK are continuing to face significant uncertainty with an international tax landscape that is also changing rapidly.

“In response to such choppy conditions, multinationals will be looking to the Government to set out a clear long-term tax strategy, whilst still remaining agile. Providing clear intent and direction for the future of its tax regime – such as that laid out in the Corporate Tax Roadmap – presents an opportunity for the Government to further support the UK’s many points of attraction for foreign investment, and emphasise its position as a safe harbour for global businesses that are grappling with the current market challenges.”

26 Mar 2025 | EY comments | Media contact: Victoria Luttig - Manager, Media Relations, Ernst & Young LLP

EY comments on the absence of pension reform in the Spring Statement 2025

Paul Kitson, EY’s UK Pensions Consulting Leader, comments on the absence of pension reform in the Chancellor’s Spring Statement:

“Pension reform is a central focus in the Government’s growth agenda, but with nothing new announced in today’s Spring Statement, the industry must now look to the expected Pension Scheme Bill and the upcoming Mansion House Speech. The Bill is expected to outline how surplus withdrawals from defined benefit (DB) pension schemes can be used to support economic growth – something that could unlock more than £150bn for UK businesses to re-invest. Following this, the Mansion House Speech could provide further detail on how pension reform will boost retirement outcomes for many millions of UK savers and support growth for innovative companies."

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

Laura Mair, UK Managing Partner for Tax and Law at EY, said:

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on Tax policy changes conspicuous by their absence

Chris Sanger, Tax Policy Leader at EY, said: “After weeks of speculation, the Chancellor kept her promise of one fiscal event a year, leaving tax policy announcements to the Autumn Budget. Attention will now turn to June’s Spending Review, followed by November’s Budget, to see whether the Chancellor increases the headroom available within the fiscal rules following the OBR’s latest forecast.

“On tax, it was always unlikely that we’d see any further changes come out of today, particularly given that measures announced last October, such as the rise in employer National Insurance contributions, are yet to come into effect. However, what we may hear in the coming weeks are announcements on tax administration and simplification efforts. While not policy changes, these positive steps include consultations on e-invoicing and cost sharing and have the potential to both reduce the tax gap and attract greater investment in the UK.

“The Corporate Tax Roadmap, published alongside the last Autumn Budget, set out to improve the certainty and predictability of our tax regime. The Roadmap provided the foundation for reform, and the Government may now look to develop this document further, delivering on its aims to simplify the UK tax system and create confidence among businesses and investors, for the benefit of the economy"

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

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Media inquiries

16 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Inflation fell again in March, but a sharp rebound is likely

15 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Labour market poses challenge for MPC

11 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

February’s rise in GDP overstates underlying strength

07 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Stamp duty changes could lead to slower activity in the housing market

01 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

March slowdown could signal a challenging few months for the housing market

01 Apr 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Manufacturing sector continues to face significant challenges

28 Mar 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

Temporary GDP slowdown in second half of 2024 confirmed

28 Mar 2025 | EY ITEM Club comments | Media contact: James White - Senior Executive, Media Relations, Ernst & Young LLP

February’s retail data consolidated January’s rebound in sales

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY Comments on Minding the gap

26 Mar 2025 | EY comments | Media contact: Victoria Luttig - Manager, Media Relations, Ernst & Young LLP

EY comments on the absence of pension reform in the Spring Statement 2025

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

Laura Mair, UK Managing Partner for Tax and Law at EY, said:

26 Mar 2025 | EY comments | Media contact: Justin Moll - Manager, Media Relations, Ernst & Young LLP

EY comments on Tax policy changes conspicuous by their absence