With 2025 unfolding, inflation continues to be a key concern for policymakers and consumers alike. In the UK, inflation showed signs of reversal after briefly hitting the Bank of England’s 2% target in 2024.
However, according to The Independent, by January 2025, the Consumer Prices Index (CPI) had risen to 3%, up from 2.5% in December, signalling renewed price pressures. The Bank of England now forecasts inflation could rise to 3.7% by Q3 2025, delaying potential interest rate cuts.
Several factors are contributing to this inflationary trend. From April, national insurance contributions and the national living wage will increase, adding pressure on businesses and consumers.
Households will also see an increase in their bills, with the average UK water bill set to rise by £123 a year to £603 (+26%) and the energy price cap expected to go up, adding £9.25 per month to household costs. Meanwhile, wage growth remains high, recorded at 5.9% in January 2025, further fuelling inflation concerns.
In the US, inflation has been described as “somewhat elevated,” with core Personal Consumption Expenditures (PCE) inflation at 2.8% in November 2024. Analysts suggest inflation could decline to 2.4% by March 2025, bringing it closer to the 2% target.
However, housing costs were a major driver of inflation in 2024, and their trajectory will be critical in determining whether inflation slows further in 2025.
Interest Rate Forecasts
The outlook for interest rates remains uncertain in both the UK and the US. In the UK, the Bank of England cut rates in February 2025, bringing the base rate to 4.5%. However, with inflation rising again, further reductions may be delayed.
While markets currently anticipate two additional cuts this year, policymakers are concerned that high wage growth and potential trade tariffs could keep inflation elevated. In the US, the Federal Reserve (Fed) paused rate cuts in January 2025, keeping the federal funds rate at 4.25%-4.50% after reducing it by 1 percentage point from September to December 2024.
Some economists predict four cuts this year, while markets expect only two, as strong economic growth and a robust labour market reduce the urgency for further easing. Interest rate decisions in both countries will depend on inflation data, labour market trends, and potential policy shifts in the coming months.
Potential Impact on Consumers
For borrowers, high interest rates remain a challenge, particularly for those with mortgages and business loans. In the UK, mortgage lenders have been slow to pass on rate cuts, and with inflation climbing, further reductions may take longer than anticipated.
In the US, mortgage rates have actually risen despite the Fed’s rate cuts, due to an increase in long-term Treasury yields. The 10-year US Treasury yield has climbed by 100 basis points since September 2024, pushing mortgage rates higher.
Analysts suggest mortgage rates will only fall if economic growth slows significantly or if inflation expectations decline.
Savings and Investments
Savers have benefited from 15-year-high interest rates, with many UK and US banks still offering returns above 4%.
However, rising inflation could erode real returns, making inflation-linked assets or tax-efficient savings accounts (such as ISAs and pensions in the UK) more attractive. Equity markets have been volatile, influenced by expectations for interest rates, AI-driven market shifts, and geopolitical risks.
The strong performance of US stocks, with indices up over 20% in the past year, has supported consumer confidence, but analysts warn that high valuations may not be sustainable if economic conditions worsen.
Consumer Prices and Trade Policies
In the US, new trade tariffs could add further inflationary pressure. The Trump administration has proposed a 25% tariff on imports from Canada and Mexico, as well as a blanket 10% tariff on all imported goods.
These policies, if implemented, could lead to higher prices for consumer goods. However, some analysts suggest these tariffs may be temporary negotiation tools rather than long-term measures.
Additionally, previous tariffs on China were partially offset by companies re-routing trade through countries like Vietnam, which could happen again.
In the UK, consumers are facing rising utility costs, adding to household financial pressures. Water bills will rise by £123 per year, reaching an average of £603, while energy prices will increase in April, adding £9.25 per month to household bills.
Additionally, the VAT increase on private school fees and rising business costs could contribute to further price increases across various sectors.
Political Pressures on Monetary Policy
The independence of central banks is being tested, particularly in the US, where political leaders are pushing for aggressive rate cuts. Donald Trump has publicly called for immediate interest rate cuts, but Federal Reserve Chair Jerome Powell has resisted political pressure, reaffirming the Fed’s independence and commitment to price stability.
Meanwhile, the European Central Bank (ECB) is also taking a cautious stance, carefully monitoring wage growth and geopolitical risks before making further rate adjustments.
