UK inflation slowed again in March – but a rate cut could be some months away

The latest Consumer Price Index (CPI) data came in at 3.2% for March. This was slightly higher than some economists expected, but takes us closer to the Bank of England’s 2% inflation target.

Shopping trolley in supermarket.
(Image credit: Craig Hastings via Getty Images)

The rate of UK inflation slowed to 3.2% in the twelve months to the end of March, down from 3.4% in February. This is the lowest level since September 2021. That’s according to the latest CPI report, released by the Office for National Statistics (ONS) this morning. 

The lower rate of inflation was driven by slowing food prices, partially offset by an upward contribution from motor fuel. The figure came in slightly higher than the 3.1% forecast by the Bank of England and economists polled by Reuters – but still signals a step in the right direction.

It is important to note that prices are still rising, just at a slower rate than they once were. Inflation peaked at 11.1% in October 2022, and has been easing steadily since.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Despite the downward trend in inflation, markets have recently revised their interest rate expectations. Some had previously hoped that the Bank of England would start cutting rates in May or June, however most are now opting for August at the earliest. We share all the details. 

Why has UK inflation slowed?

Slowing inflation was driven by downward contributions in six divisions, the ONS reports, with the largest impact coming from food and non-alcoholic beverages, furniture and household goods, and clothing and footwear.

Slowing food costs will be a “big relief” for households given food inflation “hit a peak of almost 20% in the spring of 2023”, says Alice Haine, personal finance analyst at Bestinvest.

The Bank of England will be pleased to see that core inflation, which strips out volatile measures like energy, food, alcohol and tobacco, also slowed to 4.2% in the twelve months to the end of March, down from 4.5% last month. 

It can take some time for price changes to work their way through a supply chain and into your wallet. This means that today’s lower inflation figure is the result of economic and monetary policy changes that took place a little while ago. 

Many of the issues that caused inflation to rise (pandemic lockdowns, supply chain disruption, the war in Ukraine, and higher energy prices) have now eased – and we are seeing the effects of this in the data.

On top of this, interest rate hikes from the Bank of England are starting to take effect. The Bank increased rates fourteen times between December 2021 and August 2023 in an attempt to quash inflation. They have been held at 5.25% for the last five monetary policy committee (MPC) meetings

What’s next for UK inflation?

The rate of inflation is expected to slow further next month to reflect falling energy bills, after the new Ofgem price cap came into effect on 1 April. 

What’s more, it is expected to average out at 2.2% for 2024 as a whole. That’s according to forecasts from the Office for Budget Responsibility (OBR), published shortly after Jeremy Hunt’s Spring Budget on 6 March. 

Despite this, UK wage growth figures – a key driver of inflation – are still coming in fairly strong. Regular earnings (excluding bonuses) increased by 6% over the three months to February 2024, according to figures released on 16 April.

Although this constitutes the sixth slowdown in a row, it is likely that the Bank of England will want to see this metric cool further before cutting the base rate.

When will interest rates fall?

Despite the slowdown in inflation, many experts are now suggesting interest rates could remain higher for longer. Markets have recently adjusted and are no longer forecasting a cut in May or June. Most are saying August or September.

“Easing inflation does not automatically guarantee an imminent interest rate cut”, Haine explains. “While the BoE acknowledges that interest rate cuts are the ‘direction of travel’, they say they require consistent evidence that inflationary pressures are in retreat before they can make a move”, she adds.  

This is bad news for the Conservative Party, which is hoping to use any improvement in the economy to its advantage as we head into a general election. A rate cut would have been a useful thing for the party to shout about as voters head to the ballot box. The election has not yet been called, but the very latest it can be held is 28 January 2025. 

Not only is wage growth still looking fairly strong, we are also experiencing other risks on the horizon. 

The US CPI reading came in hotter than expected on 10 April, showing that prices had increased by 3.5% in the twelve months to the end of March. The figure was up from 3.2% in February. Naturally, events in the US have an impact on other economies such as the UK. We explore the full implications in a recent feature

On top of this, we are currently experiencing heightened geopolitical risk in the middle east. If tensions between Israel and Iran escalate further, we could see a knock-on effect on oil prices, global supply chains and, ultimately, inflation. 

The good news is that the UK economy has proved fairly resilient so far this year, despite slipping into recession in the final three months of 2023. The country’s output or gross domestic product (GDP) is estimated to have increased by 0.3% in January and 0.1% in February. 

The flipside is that this growth, however small, will give the Bank of England comfort that higher interest rates aren’t hurting the economy too much just yet. 

The Bank of England’s next MPC meeting will take place on 9 May. We have pulled together a list of all remaining MPC meeting dates in 2024

What does this mean for savers and homeowners?

The good news for savers is that they can secure inflation-busting rates on their cash deposits. The most competitive savings accounts are currently offering rates north of 5%. What’s more, with rate cuts from the Bank of England being pushed further out on the horizon, higher savings rates could stick around for a little longer. 

That said, some of the best deals have already disappeared from the market since savings rates peaked last year – so it is worth acting now if you haven’t already. 

If you are able to lock your cash away for a longer period of time, you could consider putting your money in a one or two-year fixed rate account. That way, the interest you are earning won’t fall when the base rate is ultimately cut.

The latest inflation reading will also be a relief to households paying off a mortgage, as it signals the economy is heading in the right direction for a cut to the base rate. However, they will be disappointed to see that market expectations have been pushed out until August or September. 

Mortgage rates have soared over the past couple of years, almost reaching 7% in August 2023. They have now fallen from this peak, but remain high. The average 2-year fixed residential mortgage is currently 5.81% and the average 5-year is 5.39%, according to the latest data from Moneyfacts (16 April).  

Katie Williams
Staff Writer

Katie Williams has a background in investment writing and is interested in everything to do with personal finance, investments, and financial news. Before joining the MoneyWeek team, Katie worked as an investment content specialist at Invesco EMEA, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. She studied English at the University of Cambridge and loves reading, writing and going to the theatre.