What does the fall in inflation mean for UK households?

UK inflation experienced another slowdown last month, potentially offering relief to financially strained households across the nation.

Official data from the Office for National Statistics (ONS) revealed that the Consumer Prices Index inflation dropped to 3.2% in March, down from 3.4% in February.

This decrease marks a significant shift from the peak inflation rate of 11.1% recorded in 2022, which followed a series of sharp interest rate hikes by the Bank of England.

Inflation, commonly understood as the rise in prices, reflects the rate at which prices are increasing. The latest inflation rate of 3.2% implies that goods and services that cost £100 a year ago now amount to £103.20.

Despite the decline in inflation, it's important to note that the cost of living isn't necessarily decreasing. Rather, the pace of price increases is slowing down. Inflation has been gradually receding since reaching its peak in October 2022, largely attributed to the notably lower energy price cap compared to the staggering £2,500 limit observed at the end of 2022.

Energy stands out as the primary sector witnessing significant year-on-year price decreases, with further declines anticipated in April with the implementation of a new price cap. Additionally, certain food items like meat have experienced price drops compared to the previous month, while furniture and household goods have also seen a decrease of 0.9% from March last year.

However, not all sectors are experiencing price decreases. Fuel prices have slightly risen in recent months, with petrol prices increasing by 2.6p per litre between February and March 2024, reaching 144.8p per litre. Moreover, prices of alcohol and tobacco surged by 12.1% in March compared to the previous month.

Regarding the impact on interest rates, the current rate stands at 5.25% after remaining unchanged over the past five votes by Bank of England policymakers. While economists initially anticipated a move towards the Bank's 2% target rate, the higher-than-expected March inflation reading, coupled with signs of persistent inflation in the services economy and continued wage growth, have led to a delay in rate cut expectations.

Looking ahead, most economists foresee a continued slowdown in inflation over the coming months. However, forecasts from the Bank of England and the Office for Budget Responsibility suggest a plateau in early summer, followed by a slight increase later in the year. Additionally, concerns raised by the International Monetary Fund regarding the escalation of conflict in the Middle East highlight potential risks of food and energy price increases globally.