17 April 2025: Reeves says that the fall in inflation shows the plan is working

The U.S. administration is pressuring the Prime Minister to either lower or remove the additional taxes that he and the Chancellor have agreed to levy against U.S. tech firms like Apple and Microsoft as part of the negotiations taking place to agree a free trade deal between the two countries.

However, Sir Keir Starmer is concerned that doing away with the taxes will simply be a part of the concessions that the country is required to make for Trump to agree to a deal or will any concessions be seen as him “pandering” to big foreign firms at the expense of British companies which are facing higher tax bills.

The good weather over the past few weeks has seen the number of migrants crossing the Channel in small boats reach record levels. This will alarm Labour Party voters in the upcoming local council elections, since undocumented immigration is a major part of the campaign that is being promoted by Reform UK.

Although Reform is currently in the middle of a row which threatens its very existence, the major plank of its immigration policy remains front and centre of the Government's travails.

A senior economist at the Institute for Fiscal Studies commented last week that a rise in the basic rate of income tax would be a more palatable way for the Chancellor to comply with her self-imposed rule, which dictates that day-to-day public spending should be funded by tax receipts and not additional borrowing.

Paul Johnson’s comments, far from being written off as another tax grab from the Chancellor, are gaining traction. This would be a seismic shift in the country’s taxation regime, which hasn’t been seen since Denis Healey raised the basic rate of income tax from 33% to 35% fifty years ago.

In wide-ranging comments, the UK’s pre-eminent independent economist went on to say that the imposition of tariffs on the UK’s exports to the U.S. risk the credibility of the Office for Budget Responsibility’s forecasts since at the time they were written there was no serious consideration being given to the extent to which Trump would “blow up” global trading policy.

The headline rate of inflation fell in March, according to the latest data, which was published yesterday. The rate of price increases fell to 2.6% from 2.8% in February. The news has increased the belief that the MPC will be encouraged to cut rates at its May meeting, even though the fall in inflation may be temporary, given the effect of Donald Trump’s tariff policies.

The MPC is only willing to make policy decisions based on what is presented to it rather than what may happen in the future, particularly given Trump’s actions' “fluidity.”

The Pound rose to a high of 1.3289 yesterday but drifted lower as traders considered the implications of lower headline inflation. It eventually closed at 1.3244.

In a keynote address on the state of the U.S. economy he delivered in Chicago yesterday, Fed Chairman Jerome Powell reiterated his belief that the risks to the economy currently remain balanced since there is little evidence of the deceleration in the rate of growth that is concerning some Wall Street analysts even as inflation is not falling as fast as had been hoped at the turn of the year.

President Donald Trump’s tariffs are “highly likely” to spur a temporary rise in inflation, the Federal Reserve Board Chair said yesterday, cautioning that those effects could end up being longer-lasting, prompting markets to slide and extend day-long losses.

Speaking before the Economic Club of Chicago, Powell said more persistent risks to inflation depend on how much tariffs end up affecting the economy and how long it takes trade policy to pass through to prices.

Investors grew nervous throughout Powell’s remarks, especially because there is so much uncertainty around how long the inflation could last, triggering a market sell-off.

It is becoming more difficult for markets to try to encourage the Fed to act due to the uncertainty, since it is unclear what it wants the Fed to do. Trump believes that immediate rate cuts would calm market nerves, but that would risk an inflationary spurt, which could see the Central Bank be forced to reverse cuts to maintain its adherence to its dual mandate of maintaining both job creation and price stability.

Powell said many of the administration’s policies on trade, immigration, fiscal matters and regulation are still evolving. But higher inflation and slower growth are in store, he said, pushing central bankers further from their goals of stable prices and a prosperous job market.

For example, supply-chain snarls from the trade war could lead to price hikes that last longer than a one-time bump.

“I do think we’ll be moving away from those goals probably for the balance of this year, or at least not making any progress,” Powell said.

Powell also said that as the Fed sets interest rates, it could end up in a place where its two mandates are “in tension.”

The next meeting of the FOMC is set for May 6/7, and very few members of the committee are prepared to be drawn on what decision will be taken on monetary policy, since economic policy changes are taking place almost daily.

The dollar index slumped to a low of 99.32 in the wake of Powell’s comments, after a day in which it remained mostly sidelined. However, it bounced off that level as some buyers emerged, closing at 99.50.

After a run of five rate cuts in a row, the ECB’s Governing Council was expected to bow to the pressure being exerted by its more hawkish members and agree on a pause for the effect of such a radical policy change was having on the Eurozone economy.

However, the pressure that has been created by the imposition of tariffs by the Trump administration has caused a total rethink by analysts, and a sixth consecutive cut is expected later this morning, even as inflation in the region continues to fall.

The annual inflation rate in the Eurozone edged down to 2.2% in March 2025, from 2.3% in February, according to the latest data released on Tuesday, April 15. Across the broader European Union, inflation stood at 2.5%.

Among member states, France recorded the lowest annual inflation at 0.9%, followed by Denmark (1.4%) and Luxembourg (1.5%). At the other end of the spectrum, Romania experienced the highest rate at 5.1%, with Hungary (4.8%) and Poland (4.4%) also facing elevated inflation levels.

The spread of inflation rates across the region highlights the difficulty of producing a “one size fits all monetary policy.

Compared to February, inflation decreased in 16 member states, remained unchanged in one, and rose in ten.

Breaking down the main components of Eurozone inflation, services saw the highest annual increase at 3.5% in March, slightly down from 3.7% in February.

Food, alcohol, and tobacco followed, with a 2.9% increase, up from 2.7% the previous month. Non-energy industrial goods remained stable at 0.6%, while energy prices fell by 1.0%, reversing a slight rise of 0.2% in February.

The fall in inflation would most likely have encouraged the ECB to consider a cut in rates even without the pressure being exerted by the current uncertainty, but it will be the tone of the speech made by ECB President Christine Lagarde that will be most eagerly awaited by the financial markets.

Lagarde has limited her speeches recently to comments on broader topics like the adoption of a European payments platform or the introduction of a digital euro, clearly feeling that until markets settle down, she does not wish to add fuel to the fire.

The euro briefly breached the 1.14 level yesterday, reaching a high of 1.1404, where it attracted some profit taking from short-term traders, which saw it settle back to close at 1.1360.

Have a great day!