"Although consumer prices are heading in the right direction, it’s not just the headline rate which determines Bank of England action."
- Susannah Streeter, head of money and markets at Hargreaves Lansdown
CPI inflation fell to 3.2% in March, the lowest level in two and a half years, but slightly less of a drop than economists had forecast.
The latest statistics from the ONS show that the biggest factor pushing inflation down was lower food prices and the biggest upwards contribution came from motor fuels.
Core CPI inflation (stripping out energy, food, alcohol and tobacco) was 4.2%, down from 4.5% in February.
However, CPIH inflation, which includes owner occupiers' housing costs, rose by 3.8% in the 12 months to March, unchanged from February.
On a monthly basis, CPI rose by 0.6% in March, compared with a rise of 0.8% in March 2023.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented: “Inflation in the UK has taken another welcome step towards target, but interest rate cuts remain elusively distant. The drop was widely expected but was slightly less than forecast, with prices at the pumps offsetting a slowdown in food price hikes.
"Although consumer prices are heading in the right direction, it’s not just the headline rate which determines Bank of England action. Policymakers scan other data, and the snapshot of stubborn wage growth out this week continues to be a concern. Unemployment may have risen, but the labour market figures are considered unreliable, and more people out of work isn’t yet translating into a sharp slowdown in wage increases, as there’s still a fight for talent in big pockets of the economy.
"Although core inflation, which strips out volatile food and fuel prices is also cooling, slowing to 4.2%, the worry is that employers could pass on higher wage bills in the form of higher prices in the months to come. It means the interest rate may stay at a painful level for even longer than earlier forecasts, with August or September being increasingly pencilled in.
"Other central banks, particularly the Federal Reserve in the United States, are taking a cautious stance, staying committed to the fight against inflation. Fed chair Jerome Powell has warned that interest rates may have to linger for longer, with confidence ebbing away that the price spiral is being brought under control.”
Jeremy Batstone-Carr, European strategist at Raymond James Investment Services, added: “Today’s consumer price index figures from the ONS show that UK inflation fell to 3.2% in March. Food, restaurant, hotel and recreation prices have risen more slowly than this time last year, although an early Easter resulted in a spike in airfares.
“Price pressures are easing slowly, though they still remain close to the Bank of England’s interim target levels. Nonetheless, the Bank will be encouraged by the dip in service sector prices and hopeful of easing wage pressures in response to an already loosening labour market in the months to come.
“The abating of inflation, which is predicted to continue over the course of the spring, should provide justification for the Bank to finally begin to lower interest rates, after holding them for six consecutive meetings.”
