UK inflation falls to two-and-a-half-year low of 3.2% – business live | Business

Newflash: City investors are trimming their forecasts for how much the Bank of England will cut interest rates this year.

Following today’s smaller-than-expected drop in inflation in March, to 3.2%, the money markets are now only fully pricing in the first rate cut in November.

Before this morning, the first cut was expected by September.

Reuters reports that UK rate futures pricing now predicts about 34 basis points of cuts to Bank rate this year, down from 42bp on Tuesday.

That suggests that one quarter-point cut to interest rates, to 5% from 5.25%, is widely expected, with only a moderate probability of another this year.

That’s clearly a blow to borrowers desperate for lower interest payments, and also to the government’s hopes for several cuts to interest rates before the next general election.

Although UK inflation has fallen, prices are still rising faster here than in much of Europe.

Eurozone inflation was provisionally estimated at 2.4% per year in March (we get updated figures at 10am today).

In France, annual inflation slowed to 2.4%, while it was just 2.3% in Germany, as this chart from today’s UK inflation report shows:

In the US, though, inflation actually rose in March, to 3.5%, creating alarm that inflationary pressures are more stubborn than hoped.

March’s drop in inflation, to 3.2%, suggests CPI is on track to soon return to the UK’s official 2% target (partly because energy bills fell in April).

But there are risks to the inflation outlook, such as the danger of a spike in oil prices if turmoil in the Middle East escalates.

Yael Selfin, chief economist at KPMG UK, explains:

“The overall outlook for inflation remains broadly positive, however there are several risks which could cause a setback. Oil prices have rallied over the past month which has led to an increase in prices at the pump for consumers. Also, the hike in the National Living Wage could potentially contribute to persistence in services inflation which remains elevated.

“Today’s data are unlikely to move the needle for the Bank of England. We expect inflation to return to target later this spring, which raises the prospect of interest rate cuts from June onwards.

Full story: UK inflation falls to 3.2%, the lowest level since September 2021

Richard Partington

The UK’s annual inflation rate fell in March for a second consecutive month, dropping to 3.2% – the lowest level since September 2021 – easing pressure on households amid the cost of living crisis.

Figures from the Office for National Statistics (ONS) show inflation as measured by the consumer prices index continued to fall from 3.4% in February. City economists had forecast a reading of 3.1%.

A reduction in the rate of inflation does not mean that prices are falling, just that they are rising more slowly. The last time inflation was lower was in September 2021, when it was 3.1%.

It comes as the Bank of England considers the timing of a first cut in interest rates after ramping up borrowing costs to the highest level since the 2008 financial crisis in response to soaring inflation. The measure for the annual increase in living costs reached a 41-year high of 11.1% in October 2022 after the Covid pandemic and Russia’s invasion of Ukraine.

More here.

The price of petrol rose by 2.6p per litre in March, today’s inflation report shows, to an average of 144.8p.

That’s still lower than a year ago, when it was 146.8p.

Diesel prices rose by 2.8p per litre in March to 154.1 pence per litre, down from 166.5p per litre in March 2023.

These movements resulted in overall motor fuel prices falling by 3.7% in the year to March 2024, compared with a fall of 6.5% in February.

Skimming through the UK inflation report, we can see that food inflation fell to its lowest level in almost two and a half years.

Prices for food and non-alcoholic beverages rose by 4.0% in the year to March 2024, down from 5.0% in February. The March figure is the lowest annual rate since November 2021, the ONS reports.

Inflation bread and cereals, and for meat, both eased.

The ONS explains:

Prices for bread and cereals rose by 0.2% on the month, compared with a rise of 2.2% a year ago, resulting in an annual rate in March 2024 of 4.0% – the lowest since January 2022. Prices of some bakery products, such as chocolate biscuits and crumpets, fell between February and March 2024 but rose between the same period a year ago.

Meat prices fell by 0.5% between February and March this year, compared with a rise of 1.4% a year ago.

This resulted in an annual rate of 3.1% in the year to March 2024, the lowest rate since November 2021. The main downward effect behind the easing in the rate came from pork products.

Core UK inflation has also fallen.

The ONS reports that CPI (excluding energy, food, alcohol and tobacco) rose by 4.2% in the 12 months to March 2024, down from 4.5% in February.

Goods price inflation fell to just 0.8%, from 1.1%.

But services inflation was higher – it only eased slightly from 6.1% to 6.0%.

The largest downward contribution to the monthly change in UK inflation came from food, with prices rising by less than a year ago, the Office for National Statistics says.

But petrol and diesel prices had an upward impact – motor fuels prices rose in March this year but fell a year ago.

Newsflash: UK inflation has fallen to its lowest level in two and a half years, as price pressures continue to ease.

The consumer prices index has dropped to 3.2% in March, the lowest since September 2021, down from 3.4% in February.

That’s slightly higher than City economists expected (they’d pencilled in a drop to 3.1%).

It brings inflation further towards the UK’s 2% target, and away from the 40-year peak over 11% in autumn 2022.

But although inflation has fallen, prices are still rising compared with last year – just at a slower rate.

It means real wages are still rising, as regular pay grew by 6% per year in the three months to February.

Economists expect a further decline in inflation in April, with potential to fall below the Bank’s 2% target after a sharp drop in household gas and electricity bills to the lowest level for two years.

Chancellor Jeremy Hunt has raised the possibility of further tax cuts before the next general election.

Speaking to the Financial Times, Hunt said the government would like to cut taxes in an autumn fiscal event “if we can”.

He also cautioned, though, that it’s too soon to know if that will be possible, while acting in a fiscally responsible way.

Hunt argued that people would feel the economy had “turned a corner later this year”, citing market forecast that the Bank of England would cut interest rates this summer or autumn.

The chancellor explained:

“As we move through the year towards the autumn, some of the changes in economic policy, including lower taxes, will be felt in people’s pockets — and that’s clearly something that is significant for us.”

Hunt didn’t leave himself much headroom for further tax cuts in March’s budget, when he announced a second cut to national insurance rates.

But this month, we have ticked into a new financial year – which gives the chancellor more time to hit his fiscal rule of getting debt/GDP falling in five year’s time…..

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Britain may take another step out of its cost of living crisis today, when the latest inflation report is released at 7am.

Economists are hopeful it will show inflation fell again in March. The consumer prices index is forecast to drop to around 3.1%, down from 3.4% in February, showing prices rose at a slower pace.

That would pull inflation down to its lowest since September 2021 (when CPI was also 3.1%), before Russia’s invasion of Ukraine the following year sent food and energy prices spiking.

A slowing in price rises would help struggling households. Yesterday, though, the IMF warned that living standards will not improve this year.

Growth per head – one of the key measures of living standards – in Britain is expected to remain flat this year, after a 0.3% drop in 2023.

The Bank of England is looking for signs that services inflation has weakened, as it weighs up when it can start lowering UK interest rates from their currrent 16-year high.

And Rishi Sunak will be hoping for a drop in inflation that allows the Bank to start cutting rates before the next election.

Last night, BoE governor Andrew Bailey expressed confidence the UK was on its way to lower rates despite the turmoil in the Middle East.

Interviewed in Washington, at the IMF/World Bank annual meeting, Bailey said the UK was “disinflating at full employment”.

The governor said:

“There is strong evidence the process is working its way through. Our judgement on interest rates is how much do we need to see before we are confident of the process”.

The financial markets have been rattled in recent days by fears that inflation in America is stickier than hoped.

Last night, Federal Reserve chair Jerome Powell conceded it is likely to take “longer than expected” for inflation to return to the central bank’s 2%, allowing cuts to US interest rates.

The agenda

• 7am BST: UK CPI inflation report for March

• 7am BST: UK producer price inflation report for March

• 9.30am BST: UK house price and rental costs data

• 10am BST: Eurozone inflation report for March (final estimate)

• 2pm BST: IMF to release its latest Fiscal Monitor report