UK Inflation Falls to 3.2% in March, Lowest in Two and a Half Years

UK inflation fell to 3.2% in March 2023, marking the lowest level in two and a half years, according to the latest figures from the Office for National Statistics (ONS). The drop in inflation was primarily driven by slowing food price rises, particularly in meat, furniture, and household goods.

The consumer prices index (CPI) rose by 3.2% in the 12 months to March 2023, down from 3.4% in February and a 40-year peak of 11.1% in October 2022. Meat prices fell by 0.5% between February and March, resulting in the lowest annual rate since November 2021 at 3.1%. The main downward effect came from pork products, and overall, the annual rate eased in eight of the 11 food and non-alcoholic beverages classes, with the only food category exempt being vegetables.

Food prices rose by 4% in the year to March 2023, down from 5% in February, marking the lowest annual rate since November 2021 and the 12th consecutive easing from a peak of 19.2% in March 2023, the highest annual rate for over 45 years. Prices for furniture and household goods also contributed to the fall, with a 0.9% decrease compared to the same month last year. Clothing and footwear inflation also slowed to 4% from 5% in February.

Why this matters: The fall in inflation is a positive sign for the UK economy, as it moves closer to the Bank of England's 2% target rate. However, the Bank remains cautious about cutting interest rates due to persistent wage and services inflation. The lower inflation rate could provide some relief to households struggling with the high cost of living.

The largest upward pressure came from motor fuels, with the average price of petrol rising by 2.6p per litre between February and March 2024. Economists expect inflation to continue to fall in the coming months, with the potential for the Bank of England to cut interest rates, although the central bank has suggested it is too early for a cut.

Prime Minister Rishi Sunak said the figures show the government's economic plan is working, while the opposition criticized the high cost of living. "The IMF said yesterday that our approach is the right one and we must stick to our plan," Sunak told Parliament. However, the drop in inflation is primarily linked to the Bank's interest rate hikes and changes to global price pressures.

Despite the slowdown in inflation, retail sales across Britain continue to hit spending, with a drop in spending at department stores on food and online. Construction group Geoffrey Osborne is also calling in administrators due to significant headwinds in the construction industry, including high inflation, the lingering impacts of COVID-19 and Brexit, and a slowdown in public sector procurement.

The headline inflation rate is expected to dip below the Bank of England's 2% target in April due to lower energy bills. However, with wages currently rising at 6%, it remains unlikely for the Bank's Monetary Policy Committee to cut interest rates in the immediate future. The Bank of England has raised interest rates to 5.25% to tackle inflation but will be closely monitoring the economic data in the coming months to determine the appropriate course of action.

Key Takeaways

• UK inflation fell to 3.2% in March 2023, the lowest in 2.5 years.
• Slowing food price rises, especially in meat, furniture, and household goods drove the drop.
• The fall in inflation is positive, but the Bank of England remains cautious about cutting rates.
• Retail sales continue to be impacted despite the slowdown in inflation.
• Headline inflation is expected to dip below 2% in April, but wage growth makes rate cuts unlikely.