Inflation in the United Kingdom eased to its lowest level in two and a half years in March after a further easing in food prices, official figures showed Wednesday. But the falling pace is slowing down, adding to signs that a first interest rate cut by the Bank of England (BoE) could be further off than previously thought.

Consumer prices rose by 3.2% in the year to March, down from 3.4% in February, the Office for National Statistics (ONS) said. That's the lowest level since September 2021.

The fall in the annual rate was not as big as anticipated. Economists had predicted a reading of 3.1% for the month. Investors reduced their bets on BoE rate cuts, and sterling rose.

Inflation is still running higher than the BoE's target of 2%, but the direction of the move appears clear. Inflation hit a high above 11% at the end of 2022 in the wake of Russia's invasion of Ukraine, which led to sharp increases in energy costs.

The fall means the U.K.'s inflation rate is lower than the U.S.'s for the first time in two years. Inflation in the U.S. rose for a second month in a row to 3.5% in March, according to data published last week.

BoE Governor Andrew Bailey, who last month said British inflation was "moving in the right direction" for a rate cut, said on Tuesday that different inflation dynamics in the U.S. and Europe could lead to different paths for interest rates.

Fight not over yet

Ruth Gregory, deputy chief U.K. economist at Capital Economics, said there was a risk that Britain will follow the trend in the U.S. and see inflation stall.

"The chances of interest rates being cut for the first time in June are now a bit slimmer," she said.

The sterling rose by about half a cent against the dollar immediately after the figures were published. It was also up against the euro.

Inflation is set to fall further in April, possibly to below 2%, as a result of sharply lower domestic energy bills, which economists think could prompt rate-setters at the Bank of England to consider a cut in interest rates in the next few months from the current 16-year high of 5.25%.

The BoE is still expected to cut interest rates later this year, but investors on Wednesday trimmed their bets on the scale of its moves, fully pricing in only one quarter-point cut by the end of 2024, possibly as late as November.

U.S. Federal Reserve (Fed) Chair Jerome Powell said on Tuesday that recent data on inflation had not given U.S. policymakers the confidence needed for them to pivot to rate cuts soon.

However, a number of the nine BoE policymakers have warned that the fight against inflation isn't over yet, as they expect prices to start rising again in the second half of the year.

"With a further significant drop due next month, inflation should soon return to target, and the pressure to cut interest rates will grow," said Simon Pittaway, senior economist at the Resolution Foundation think tank.

Small easing of inflation pressures

Details of Wednesday's data showed core inflation, which excludes energy, food and tobacco prices, slowed to 4.2% from 4.5% in February.

Services inflation, an indicator of domestic price pressures which the BoE also watches closely, eased only slightly to 6% from 6.1%.

The statistics office said a slowdown in food prices was the main contributor to the decrease in headline inflation. Prices of food and nonalcoholic beverages increased by 4% over the 12 months to March, their weakest rise since November 2021.

However, an increase in fuel prices slowed the fall in the headline rate. International oil prices climbed last month amid growing tensions in the Middle East.

Data published on Tuesday showed that British wage growth was cooling but remained strong by historical standards.

The BoE is concerned that rapid wage growth, which makes up much of the inflation rate in the services sector, could sustain inflationary heat across the economy.

"Inflation is in retreat, but the Bank of England cannot yet be sure that it is beaten," Ian Stewart, chief economist at Deloitte, said.

The BoE, like the Fed and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia's invasion of Ukraine.

Higher interest rates – which cool the economy by making it more expensive to borrow, thereby bearing down on spending – have contributed to bringing down inflation worldwide.

Britain's governing Conservative Party hopes that lower inflation and falling interest rates may trigger a feel-good factor ahead of a general election that has to take place by January 2025.

Opinion polls show the main opposition Labour Party way ahead and headed for a big victory over the Conservatives, who have been in power since 2010.