UK inflation slows before expected jump from April

By Suban Abdulla and William Schomberg

LONDON (Reuters) - British inflation slowed to its weakest in three months in March and other measures watched by the Bank of England cooled too, but higher bills and employer costs will pressure prices soon against the backdrop of U.S. President Donald Trump's trade war.

Inflation slowed to an annual rate of 2.6% in March from 2.8% in February, below expectations of 2.7% in a BoE forecast and a Reuters poll of economists.

A price drop for computer games and falling fuel prices helped bring down the headline rate although the prices of clothes rose strongly after a surprise fall in February, the Office for National Statistics said.

"This is very much the calm before the storm," former BoE interest rate-setter Michael Saunders said, pointing to April's increases in gas, electricity and water prices, alongside higher taxes on employers, which could push inflation to 3%.

"And we'll start to see the effects on the economy of Storm Donald with the Trump trade wars," Saunders told BBC radio.

He said inflation was now likely to peak below the BoE's most recent forecast of 3.7% in the third quarter this year, but the cost would be a hit to economic growth.

The BoE - which has an inflation target of 2% - said in February it expected inflation to leap to 3.6% in April as regulated tariffs for household utility bills go up.

Since those forecasts were made, Trump's decision to impose sweeping trade tariffs have raised the prospect of a slowdown in the global economy.

Martin Sartorius, principal economist at the Confederation of British Industry, said the higher US tariffs could put both upward and downward pressures on inflation in the UK, but the BoE was likely to cut interest rates next month.

Financial markets put a roughly 86% chance on the BoE cutting its benchmark Bank Rate by a quarter of a percentage point at its next monetary policy announcement on May 8, up from about 80% from before the inflation data.

"Looking ahead, we expect them to continue their 'gradual and careful' approach to reducing borrowing costs amid an uncertain economic environment," Sartorius said.

BoE Deputy Governors Clare Lombardelli and Sarah Breeden and Monetary Policy Committee member Megan Greene have all said it is too early to judge the inflation implications resulting from Trump's moves.

Trade experts have said China is likely to send cheaper exports to Europe after being effectively barred from the U.S. market due to high tariffs on the Asian powerhouse.

Sterling fell by about a fifth of a cent against the US dollar after the figures were published.

Inflation in the euro zone also fell in March to 2.2% and to 2.4% in the U.S.

KEY MEASURES COOL

Wednesday's data showed inflation for UK services - something the BoE considers to be a good guide of price pressures in the economy - slowed to 4.7% from 5.0% in February. The Reuters poll had pointed to a 4.8% increase.

Core headline inflation, which excludes energy, food and tobacco prices, also eased a touch.

However, despite a slowdown in price growth from levels above 11% in 2022, inflation in Britain continues to be a concern for consumers.

Inflation expectations among the public and business have risen, adding to unease among BoE policymakers who are keeping a close eye on other gauges of price pressures in the economy as they assess when to reduce borrowing costs.

(Reporting by Suban Abdulla; Graphics by Sumanta Sen; Editing by William Schomberg and Toby Chopra)