The rate of inflation fell last month to its lowest level since September 2021 but missed City forecasts of a steeper drop.
The official measure of the cost of living the Consumer Prices Index, dropped to 3.2% in March, down from 3.4% in February, according to the Office for National Statistics (ONS).
However, the City had been expecting the CPI to fall to 3.1% prompting fresh concerns about “sticky” inflation taking longer than expected to control.
The measure peaked at 11.1% in October 2022 after the full scale Russian invasion of Ukraine triggered a sudden spike in energy prices all over the world that wreaked huge damage to global economic growth.
The UK slipped into a recession in the second half of the year as the Bank of England move to contain inflation by rapidly increasing interest rates to their current level of 5.25%, where they have been stuck since last August after 14 consecutive hikes.
ONS Chief Economist Grant Fitzner said: “Inflation eased slightly in March to its lowest annual rate for two and a half years.
“Once again, food prices were the main reason for the fall, with prices rising by less than we saw a year ago.
“Similarly to last month, we saw a partial offset from rising fuel prices.”
Food inflation dropped from 5% to 4%, the lowest rate since November 2021 The rate has eased for the 12th consecutive month from a peak of 19.2% in March 2023, the highest annual rate seen for nearly half a century.
Inflation has been falling steadily over recent months as energy costs have subsided, but have still not yet dropped below the Bank’s target rate of 2%.
That is though likely to happen in the April figure that will be revealed by the ONS in a month’s time, which will reflect the impact of this month’s sharp £238 a year drop in the energy price cap.
Core inflation, which does not include “volatile” components such as food and energy and is closely watched by the Bank’s Monetary Policy Committee (MPC) dropped from 4.5% to 4.2%.
However services sector inflation only dropped from 6.1% to 6%, a smaller drop than the markets were expecting.
Another key measure tracked by the MPC, the rate of wage increases, is only slowly coming down. ONS figures this week showed wages still rising at 6%, far higher than the MPC will be comfortable with.
Chancellor of the Exchequer, Jeremy Hunt said: “The plan is working: inflation is falling faster than expected, down from over 11% to 3.2%, the lowest level in nearly two and a half years, helping people’s money go further.
“This welcome news comes on top of our cuts to national insurance, which save the average worker £900 a year, so people should start to feel the difference as well as see it in their pay cheques.”
Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services, said: 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.”
