UK inflation fell to its lowest level in five months in March, offering welcome relief to households and strengthening the case for further interest rate cuts by the Bank of England.
According to the latest data from the Office for National Statistics (ONS), the annual inflation rate dropped to 2.6% in March, down from 2.8% in February. This figure is significantly below economists’ and the Bank of England’s forecasts and marks the slowest pace of inflation since October 2024.
The decline was largely driven by falling petrol prices and stagnant food costs. Grant Fitzner, chief economist at the ONS, stated, “Inflation eased again in March, driven by a variety of factors including falling fuel prices and unchanged food costs compared with the price rises we saw this time last year. The only significant offset came from clothing, which rose strongly following an unusual decrease in February.”
Key inflation measures closely watched by the Bank of England also showed signs of cooling. Services inflation, a key gauge of domestic price pressures, dropped to 4.7% from 5%, while core inflation—which excludes volatile items like food and energy—slipped to 3.4% from 3.5%.
The drop was further supported by softer price increases in categories such as games and toys. Food inflation eased to 3% from 3.3%, and the Retail Price Index (RPI), still used in some contracts, declined to 3.2% from 3.4%.
Despite this improvement, inflation remains above the Bank’s 2% target. Economists warn that rising household energy bills could push inflation higher again in the summer. Still, the latest figures have prompted financial markets to increase their expectations for interest rate cuts—from three to four—by the end of the year. The Bank of England is next due to meet on May 8.
Chancellor Rachel Reeves welcomed the news but noted ongoing challenges. “Families are still struggling with the cost of living, and those anxieties are being compounded by the volatility in global markets driven by President Trump’s tariffs,” she said. “But with inflation falling for two consecutive months, wages outpacing prices, and positive economic growth, there are signs our economy is turning a corner.”
President Trump’s protectionist trade policies have disrupted global trade flows, with the UK currently facing a 10% tariff on exports to the US. The Office for Budget Responsibility has warned that a deepening trade war could negatively impact GDP and place further downward pressure on inflation.
Economists believe this trade environment could continue to push inflation lower. “Trade diversion may lead to discounted exports from Europe and Asia being redirected to the UK,” said Yael Selfin, chief economist at KPMG UK.
Markets reacted positively to the inflation data. The pound rose 0.4% against the dollar to just under $1.33, while bond yields declined, reflecting growing confidence in a cooling inflationary environment. However, equities edged lower, with the FTSE 100 and FTSE 250 both down slightly.
While the latest data points to an improving outlook, analysts caution that global trade tensions and domestic cost pressures will remain key factors shaping the UK’s economic path in the months ahead.
