The rate of Consumer Prices Index (CPI) inflation in the UK has eased to 2.6% for March, marking a welcome slowdown after months of rapid price increases. Official figures released recently show that inflation, which had been as high as 2.8% in February, fell for the second consecutive month. The drop has been attributed to falling petrol prices and a reduction in the cost of certain consumer goods, such as video games.
However, while inflation may have slowed, the situation remains fluid, and economists predict it could spike again in April. The latest figures have prompted many to ask what the fall in inflation means for households and the wider economy.
What is inflation?
Inflation is the term used to describe the rising cost of goods and services over time. The inflation rate indicates the speed at which prices are increasing. For example, the March inflation rate of 2.6% means that a product that cost £100 a year ago would now cost £102.60. While prices are still rising, the slower pace of inflation in March compared to February is a sign that the pressures on household budgets may be easing somewhat.
Is inflation falling for everything?
While inflation is generally slowing, not all goods and services are seeing price reductions. For example, clothing and footwear prices rose again in March after a surprising dip in February. Additionally, furniture prices also saw an increase. The overall trend, however, suggests that some of the most pressing inflationary pressures are easing, especially in key areas like motor fuel and recreational products.
What contributed to the slowdown in inflation?
One major factor behind the slowdown was the decrease in fuel prices. The Office for National Statistics (ONS) reported that the price of petrol fell by 1.6p per litre from February to March, dropping to 137.5p per litre from 144.8p per litre in March 2024. Diesel prices also saw a reduction of 1.6p per litre, and they are down by 6% compared to the previous year.
In addition to falling fuel costs, prices in the recreation and culture sector increased at the slowest rate for over three years, with video game prices falling. Certain groceries, such as rice, fish, and jam, also saw sharper price reductions.
Will inflation keep falling?
Unfortunately, the drop in inflation is likely to be short-lived. Economists predict that inflation will rise again in April, potentially reaching as high as 3.6%. The Bank of England has indicated that inflation could peak at around 3.7% later this year before gradually returning to the target 2% level.
Experts warn that inflationary pressures are expected to surge again due to a combination of higher consumer bills, increased business taxes, and rising labour costs.
Why will inflation rise in April?
Several factors are contributing to the expected rise in inflation for April. From this month, households will face a higher energy price cap, which will add an average of £9.25 to their monthly bills, equating to an extra £111 annually. Furthermore, water bills are set to rise by an average of £86, or 20%, as part of a five-year agreement between the water companies and regulator Ofwat. Additionally, council tax bills will increase for millions of households, with many local authorities in England hiking the typical band D bill by 5%.
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How will taxes affect the cost of living?
The government has stated that it will not raise taxes for working individuals, meaning income tax rates are unlikely to change. However, taxes on businesses are set to rise, particularly with a higher rate of employer national insurance coming into effect. Many businesses, particularly those in retail and hospitality, have indicated that they may pass on the additional costs to consumers, leading to higher prices in shops, supermarkets, and even restaurants.
Matt Swannell, chief economic advisor to the EY ITEM Club, suggested that businesses are likely to pass on some of the increased labour costs caused by the rise in national insurance contributions and the national living wage.
What does the rise in inflation mean for interest rates?
Typically, high inflation is met with higher interest rates, which are designed to curb spending and bring inflation under control. The lower-than-expected inflation figure for March may provide the Bank of England with the justification to consider reducing interest rates, which are currently at 4.5%. Myron Jobson, senior personal finance analyst at Interactive Investor, noted that a rate cut in May seems increasingly likely, as the Bank of England responds to concerns about an economic slowdown potentially triggered by rising tariffs.
In conclusion, while the recent fall in inflation is good news for households, the cost of living is far from stable. Higher bills, increased taxes, and a potential rise in inflation later this year will continue to put pressure on household budgets. However, the Bank of England may take action to manage the situation, and only time will tell how these factors will ultimately affect the economy and consumers in the long run.
