Client Update - 20th February 2026

For once, the UK’s inflation story is drifting from grim to vaguely cheerful. After four years of outpacing the US and euro area, and after a 3.4% rise in prices over the past year, inflation now looks set to drop sharply. Come April, it is expected to fall to around 2%, basically bang on the Bank of England’s target. Even President Trump might secretly envy a central bank that looks like it can actually hit 2%.

Three forces are doing the heavy lifting. First, energy. The combination of lower wholesale gas prices and measures in the November Budget should push the Ofgem price cap down by about 8% in April, finally taking some heat out of household bills. Second, a whole batch of regulated pricing that jump each April will be much lower this time – and some of last year’s big rises simply drop out of the annual comparison. Remember that 26% increase in water and sewerage bills from last April - that will drop out and no longer counts, nor do last year’s moves in vehicle duty, rail fares or the VAT hike on private school fees. Third, global agricultural prices are easing, so food inflation – the repeat offender of recent years – should calm down.

Beneath the headline, the underlying picture is also improving. Core inflation, which strips out food and energy, ought to fall as well. The earlier combination of higher national insurance, big minimum wage rises and brisk pay growth pushed firms’ costs up; now the labour market is softening. Unemployment has risen from 3.6% in mid‑2022 to 5.1%, and wage growth is expected to slow noticeably this year.

If the forecasts are right and inflation hovers between 2% and 2.5% for the rest of 2026, workers finally get something real: pay packets that grow faster than prices. Real wages should keep rising, and lower inflation also gives the Bank of England an opportunity to cut interest rates. Two 0.25% cuts by the autumn would take the bank rate down towards 3.25%, easing mortgage and business borrowing costs. It is not a return to the era of free money, but it is a noticeable loosening of the screws.

Meanwhile, across the Atlantic, Trump is living proof that while UK inflation is cooling, geopolitical noise is not. Japan has effectively bought itself a calmer relationship with Washington by signing up to a vast trade‑and‑investment package. This weeks reported “$35 billion” is merely the down payment on a promised $550 billion of Japanese investment in US projects, from oil and gas infrastructure and export terminals to critical‑minerals plants and niche manufacturing. In return, Trump caps tariffs on Japanese exports at roughly 15%, instead of unleashing the much higher duties he’d threatened, especially on cars. Tokyo gets predictability and a friendlier US security partner; Trump gets to brand the whole thing a “massive” win for American jobs and proof that tariffs “worked”. You could say Japan has secured a slightly calmer Trump for $35 billion down and $515 billion to go.

Not everyone in Washington is quite so soothed. Trump’s enthusiasm for tariffs has opened a second front – this time with America’s own central bank. A New York US Federal Reserve (Fed) paper recently concluded that US businesses and consumers ended up paying nearly 90% of the cost of Trump’s tariffs in 2025. Kevin Hassett, head of the National Economic Council, denounced it as “the worst paper” he had ever seen at the Fed and suggested the authors should be “disciplined” for producing such a supposedly partisan piece of work.

That did not go down well at the Fed. Minneapolis Fed president Neel Kashkari, who sits on the rate‑setting committee, said Hassett’s comments were “another step” in attempts to compromise the central bank’s independence, pointing to a string of pressures from the Trump administration – including a criminal probe into a $2.5bn refurbishment of Fed headquarters and an unprecedented attempt to sack governor Lisa Cook. The Fed’s message, delivered with the strained serenity of people used to political turbulence, is that it will “tune out the noise” and keep its eyes on maximum employment and stable prices.

The White House insists this is all a misunderstanding: Hassett, it says, fully respects Fed independence and was merely calling for higher research standards, arguing that the tariff paper was flawed and geared more to headlines than peer review. Still, the episode underlines an odd contrast. In the US, the central bank is fending off political interference while the inflation debate rages on. In the UK, by contrast, the Bank of England may finally be able to enjoy something it has not had for years: inflation near target, gently falling rates and – whisper it – a more supportive outlook for the UK economy. Do have a good weekend.