Impact of drop in inflation for household budgets, energy bills and interest rates over the next few months
UK inflation dropped to a fresh two-and-a-half year low in March on the back of a further easing in food prices, official figures have shown. The Office for National Statistics (ONS) said Consumer Prices Index inflation stood at 3.2 per cent in March, down from 3.4 per cent in February.
The drop was heavily linked to a slowdown in food price inflation, which was also its lowest for more than two years. Inflation for food and non-alcoholic drinks dipped to 4 per cent for the month, from 5 per cent in February, to reach its lowest level since November 2021.
The increased slowdown was partly driven by a fall in meat prices and lower rises for bread and cereals, the ONS said. Furniture and household goods prices also contributed to the fall, with prices in the sector down 0.9 per cent in March compared with the same month last year.
Elsewhere in retail, clothing and footwear inflation also slowed to 4 per cent for the month, from 5 per cent in February, after women’s clothing stores increased prices by less than normal for this time of year.
The largest upwards pressure came from motor fuels, after the average price of petrol rose by 2.6p per litre between February and March 2024 to stand at 144.8 pence per litre, according to the ONS.
ONS chief economist Grant Fitzner said: “Inflation eased slightly in March to its lowest annual rate for two-and-a-half years. Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago and similarly to last month, we saw a partial offset from rising fuel prices.”
The overall reduction in inflation comes after rate setters at the Bank of England hiked interest rates to a 15-year-high of 5.25 per cent in order to put pressure on demand.
Economists expect inflation for April to show a further fall in inflation, supported by another drop in energy prices, as CPI moves closer towards the central Bank’s 2 per cent target rate.
This has also increased speculation that the central bank could cut interest rates in the coming months, although Governor Andrew Bailey and other members of the Bank’s monetary policy committee have so far suggested it is too early for a cut.
Inflation drop in a nutshell
Inflation is the term used to describe rising prices. The inflation rate refers to how quickly prices are going up.
March’s inflation rate of 3.2 per cent means that the same things that cost a household £100 a year ago now cost £103.20.
The fall of inflation was slightly less than expected, with economists having predicted it would hit 3.1 per cent for the month.
Does this mean the cost of living is falling?
Not yet. Falling inflation does not mean prices are dropping, just that the pace of increases is slowing.
Inflation has been steadily easing back after hitting a peak of 11.1 per cent in October 2022. This is largely due to the significantly lower energy price cap compared with the eye-watering £2,500 limit seen at the end of 2022.
What is going down in price?
Energy is the main area which is down notably year-on-year, and is due to fall further in April as the new price cap comes into force. The ONS said on Wednesday that some food items have seen price decreases, such as meat, which was cheaper in March than it was in February.
The price of furniture and other household goods has also dropped, down 0.9 per cent against March last year. Housing costs also dropped, according to the figures.
What is still getting more expensive?
Fuel is broadly cheaper than a year ago but has ticked higher in recent months, with the price of petrol up 2.6p per litre between February and March 2024 to stand at 144.8p per litre.
Meanwhile, some consumer items also saw increases. Alcohol and tobacco prices were up 12.1 per cent for March, rising from an inflation rate of 11.9 per cent the previous month.
Where is inflation set to go from here?
Broadly, most economists expect inflation to continue to slow over the coming months. Thomas Pugh, UK economist at RSM, said “inflation is likely to fall to around 2% in April before lurching below that in May”.
However, the Bank of England and Office for Budget Responsibility’s most recent forecasts have both projected that it will plateau in early summer before moving slightly higher later in the year.
It also comes amid warnings from the International Monetary Fund (IMF) that the escalation of conflict in the Middle East risks pushing up food and energy prices across the world.