UK Inflation Falls to Lowest Rate in 2.5 Years

Britain's Chancellor of the Exchequer Jeremy Hunt attends a session on artificial intelligence during the World Economic Forum annual meeting in Davos, Switzerland, on Jan. 18, 2024. Fabrice Coffrini/AFP via Getty Images

UK inflation fell to its lowest rate in two and a half years in March, driven by easing in food prices.

The Consumer Prices Index (CPI) dropped to 3.2 percent last month, down from 3.4 percent in February. A slowdown in prices growth was welcomed by the government.

“Inflation has fallen—again. It’s now at 3.2 percent, the lowest it has been in over two and a half years,” said Prime Minister Rishi Sunak.

Chancellor Jeremy Hunt said that falling inflation coupled with other government policies makes a difference to family budgets.

“The plan is working, and we’re turning a corner. Inflation is falling faster than expected, significantly down from its 11 percent peak. Really welcome news. Alongside our tax cuts, worth around £900 a year to the average worker, people should start to feel the difference in their pay packets,” said Mr. Hunt.

Labour has, however, questioned the government’s achievement of bringing inflation down in March.

“Conservative ministers are hitting the airwaves today to tell the British people that they have never had it so good. But, after 14 years of Tory economic failure, we are worse off. Rishi Sunak is too weak to fix the economy and too out of touch to deliver,” said shadow chancellor Rachel Reeves.

Trends

The Consumer Prices Index, including owner occupiers’ housing costs (CPIH), rose by 3.8 percent, in the 12 months to March, remaining unchanged from February.

The main upward contribution to both CPI and CPIH annual rates came from food and non-alcoholic beverages. The annual inflation rate for food and non-alcoholic beverages hit the lowest value since November 2021.

Prices drop for furniture and household goods represented the largest annual fall since September 2016.

Inflation easing was offset by rising motor fuel prices, similar to the last month, said ONS Chief Economist Grant Fitzner.

The annual rate remained negative for the thirteenth consecutive month, 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.

Elsewhere, restaurants and hotels made the largest contribution to the annual CPI rate, dropping to 0.82 percent from 0.83 percent in February. Similarly, annual CPIH inflation in clothing and footwear slowed to 3.9 percent for the month, from 5 percent in February.

Interest Rates

Inflation easing and movement closer to the 2 percent target, set by the Bank of England (BoE), boosts expectations of further interest rate cuts. BoE economists, however, have cautioned against imminent cuts, arguing that more evidence of sustainable inflation easing was necessary.

The bank’s Monetary Policy Committee (MPC) expects inflation to hit its 2 percent target in the second quarter 2024, before increasing again in subsequent quarters. Last month, the MPC policymakers held the rate at 5.25 percent by a majority vote of eight to one.

The rate has remained unchanged since August 2023, after a 5.15 percentage points hike since August 2021. However, the pressure to cut interest rates will grow amid expectations of a further significant inflation drop in April.

The latest easing in prices brought an end the UK’s “unwanted status as an outlier on inflation,” according to the Resolution Foundation think tank.

While still above the Eurozone rate of 2.4 percent, March saw the UK inflation fall below that of the United States for the first time in two years.

The U.S. year-over-year inflation rose to 3.5 percent in March, from 3.2 percent in February.

“Many economies have struggled through an inflation-driven cost of living crisis over the past two years, but the UK has been an outlier—experiencing a prolonged period double digit price rises. With UK inflation finally falling below the U.S., its unwanted outlier status is over,” said senior economist at the Resolution Foundation, Simon Pittaway.