You're not alone if you’re struggling to keep up with where the UK economy is headed. One month inflation undershoots, the next it rebounds sharply. Rate cuts are priced in, then pulled back. Meanwhile, the housing market defies logic, and GDP data swings between contraction and recovery. In short, it’s messy. But within the volatility lies a more apparent trend—if you know where to look.

Inflation: Still Elevated, Still Sticky—But Not as Hot as It Looks

CPI inflation jumped to 3.5% in April, up sharply from 2.6% in March, as government-set and indexed prices (energy, water, vehicle excise duty) came through with force. According to Pantheon Macroeconomics, these administered increases added a 1.0 percentage point to CPI. In contrast, erratic seasonal effects like airfares and package holidays added just 8 basis points—a surprisingly small role in the inflation spike.

Core inflation climbed to 3.8%, and services inflation spiked to 5.4%—the sharpest monthly increase in services prices since 1991. This directly resulted from the minimum wage hike and National Insurance contributions, particularly in labour-intensive categories like hospitality.

But a closer look tells a different story. CPI for hotels, restaurants, and cafés fell back, despite being most exposed to wage pressure. Instead, a major contributor to the services' surprise was a little-watched CPI category: “other services for personal transport equipment,” which includes car parking, MOTs, and notably Vehicle Excise Duty (VED). That sub-index jumped from 5% to 20% year-on-year, following the VED hike and removal of EV exemptions—this component, not broad-based wage inflation, materially lifted the April data.

So while April’s inflation print looked hot, much of the pressure was fiscal in origin. Still, underlying services inflation—excluding rents, holidays, and volatile components—remains elevated at 4.3% year-over-year, and accelerated to 5.1% annualised on a three-month basis. Disinflation is slowing, not accelerating.

Will the Bank of England Cut Rates?

Earlier in the year, markets confidently priced three cuts in 2025. That number has dropped following recent inflation surprises and cautious commentary from BoE insiders like Huw Pill. Two cuts—in August and November—are now the base case, but even that could prove optimistic.

The BoE is in a tight spot. Growth is weak, real wage gains are fading, and unemployment is drifting up to 4.5% by year-end, according to Pantheon’s forecasts. Yet, the risk of de-anchoring inflation expectations after five years above target remains real. They may still cut—but opportunistically, not predictably.

That said, May’s PMI release offered some dovish comfort to the MPC. The S&P Global/CIPS composite PMI rose to 49.4, from 48.5 in April, led by a rebound in the services PMI to 50.2, just above the growth threshold. Manufacturing remains under pressure, with the PMI falling to 45.1, and the manufacturing output index is also down. Overall sentiment, however, appears to be stabilising.

The improvement came from a UK–US trade agreement, which helped alleviate uncertainty after President Trump’s tariff threats. UK economic policy uncertainty also fell sharply from April’s peak. While the PMI is sentiment-sensitive and volatile, the May data suggests the worst confidence drag may be behind us.

Importantly, the price balances moved decisively lower, which will help the MPC breathe easier. The input price balance fell to 64.6, down from 67.9 in April. The output price balance fell to 55.4, and in services alone, to 55.3 levels consistent with underlying services inflation falling to 4.2% (3m/3m) from 5.1%.

Forward-looking indicators also improved. The future output balance surged to 65.9, the most significant monthly rise in nearly five years, and the new export orders balance rebounded to 45.9, although still below pre-shock levels.

Pantheon’s adjusted models now point to potential growth of up to 0.3% in Q2, once you strip out the PMI’s overreaction to policy uncertainty, which has fallen sharply since April. So while the headline index remains weak, the underlying trend appears more stable, and momentum in the complex GDP data continues to outpace the surveys.

The MPC will also welcome signs of cooling inflation. Input and output price balances eased sharply in May, with Pantheon estimating that underlying services CPI could dip below 4% (3m/3m annualised). Margin compression reappears as firms resist price hikes, supporting the disinflation trend.

However, employment balances are below 50, meaning firms are still shedding jobs, albeit slower than earlier this year. The worst of the payroll tax shock may be behind us, but labour market softness remains a concern heading into H2.

Meanwhile, the CBI Industrial Trends Survey paints a bleaker picture for manufacturing. The total orders balance fell to -30, from -26, the lowest since late 2023. Manufacturing has lagged since the pandemic and faces a fracturing global trade landscape. Export orders recovered slightly, but future output expectations fell to -14, and price expectations ticked up, suggesting pressure on producer prices may build. We expect manufacturing activity to remain subdued, despite easing tariffs, as global uncertainty weighs on investment and output.

Consumer Demand and House Prices: Surprisingly Resilient

Despite higher rates and uncertainty, house prices rose 1.4% in March, capping a strong Q1. Year-over-year, prices are up 6.4%—the highest since early 2022. Part of this reflects buyers rushing to beat April’s stamp duty changes. Still, the demand side remains robust. Cash buyers led the charge, and surveys show that stamp duty is less of a deterrent than deposit affordability.

On the consumer side, the GfK confidence index rose to -20 in May from -23 as uncertainty eased and financial conditions stabilised. Headline sentiment remains well below pre-COVID levels, but the components tell a more optimistic story: personal finance expectations jumped to +2. At the same time, major purchase intentions rose to -16 levels, consistent with solid retail spending.

Looking ahead, gradually easing wage growth, sticky inflation (~3.5%), and the risk of tax hikes could weigh on momentum. But real incomes are still growing, savings buffers remain healthy, and interest rates are less of a drag. We expect real consumer spending to rise 0.4% quarter-on-quarter through 2025, providing an anchor of resilience even as the macro backdrop remains mixed.

Pantheon now expects 4.0% house price growth in 2025, up from 1.8% in 2024.

What This Means for Automotive and Retail

For automotive retailers, the second half of 2025 presents a genuine opportunity. Lower rates mean cheaper car finance, improving affordability and unlocking pent-up demand. This matters particularly for new car sales, which rely heavily on structured finance packages.

Used car dealers should also benefit. As finance becomes more accessible, customers may upgrade to higher-value stock. If retailers can manage inventory and supply constraints effectively, that means better margins.

At the same time, rate cuts will ease pressure on dealers’ funding lines, allowing for better stock financing, margin retention, and reinvestment in digital tools, marketing, and customer service. This is a welcome tailwind after years of volatility.

Public Finances: Borrowing Overshoots Again—Tax Rises Coming?

Public sector net borrowing (PSNB ex.) came in at £20.2B in April, above April 2024’s figure (£19.1B) and the market consensus of £ 17.9 B. More tellingly, it appears to have overshot the OBR’s internal projection, which Pantheon estimates at £ 15.2 B.

This overshoot matters. Borrowing ran higher than forecast in 11 of the 12 months of the 2024/25 fiscal year, and April suggests that trend is continuing into the new year. While receipts rose by £5.6B and NICs reforms boosted revenues by £1.7B, current spending rose by £4.2B and net investment dropped, mainly due to a reduction in APF payments.

The OBR expects borrowing to fall to £117.7B in 2025/26, down from a revised £148.3B last year. However, given how optimistic previous years’ forecasts proved (the March projection for 2024/25 was just £137.3B), that sharp fall feels highly ambitious.

With GDP growth upgraded and trade tensions easing slightly, the Chancellor has more breathing room than last month. But structural pressures remain—including higher defence spending, potential benefit reversals, and the long-term drag of weaker-than-expected tax receipts. The Government continues to assert its commitment to meeting fiscal rules, but speculation is mounting that tax rises are inevitable.

Indeed, Labour leader Keir Starmer notably declined to rule out tax increases in a recent interview. Our base case remains that taxes will rise in the Autumn Budget, particularly if the Government is serious about delivering on defence and welfare pledges without breaching fiscal headroom.

Broader Economy: Not in Crisis, But Not in Cruise Control

Pantheon’s GDP forecast 2025 is 1.4%, modest but more substantial than the anaemic 0.9% expected for 2024. Wages are rising slowly, and employment is expected to rebound into positive territory after a weak 2024. Inflation should gradually fall below 3% by early 2026, barring new energy shocks or global trade disruptions (like Trump’s renewed tariff threats).

That’s not a growth boom, but it is a platform. A slow recovery allows investors, operators, and founders to plan, hire, and build more confidently. For those of us in venture and private capital, this environment rewards businesses with recurring revenues, pricing power, and substantial operational leverage. Sectors like mobility tech, AI SaaS, and energy transition infrastructure remain central to our strategy at Cambria Private Capital.

Final Thoughts: Strategy Over Sentiment

If the past five years taught us anything, reactionary strategy is a losing strategy. Whether it was Brexit, COVID, Ukraine, or sticky inflation, the winners have positioned themselves early, stayed flexible, and managed capital with discipline.

The second half of 2025 presents that kind of window. The noise in the inflation data will fade, and monetary policy will likely shift just enough to support growth. Whether you’re a founder, investor, or operator, the question is: are you ready to capitalise?

Have a great week.