UK Inflation Dips to 3.2%: What the Surprise Slowdown Means for Households and the Bank of England

UK inflation has fallen more sharply than economists expected, dropping to an annual rate of 3.2% in the 12 months to March 2024. The decline, driven largely by easing food price pressures, has brought the headline rate to its lowest level in more than two years and revived debate over when the Bank of England should start cutting interest rates.

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Inflation Falls Faster Than Forecast

According to official figures from the Office for National Statistics (ONS), the Consumer Prices Index (CPI) rose by 3.2% in the year to March, down from 3.4% in February. Economists surveyed by Reuters had expected a slightly lower reading of 3.1%, but markets had been braced for the possibility that inflation could prove stickier after a long period of price surges.

The latest drop marks a sharp retreat from the double‑digit levels seen in late 2022, when inflation peaked above 11% amid soaring energy and food costs. Yet, despite the progress, price growth remains above the Bank of England’s 2% inflation target, keeping pressure on policymakers to balance the fight against inflation with the risk of weakening economic growth.

Food Prices Cool, Motor Fuels Push Upward

The ONS said that the largest downward contribution to the fall in the annual rate came from food and non‑alcoholic beverages, where prices are still rising but more slowly than a year ago. The relief will be particularly significant for lower‑income households, which tend to spend a larger share of their budgets on essentials such as groceries.

At the same time, motor fuels exerted an upward pressure on inflation, with petrol and diesel prices higher than in March 2023, when pump prices were falling. Transport costs have become a volatile component of the inflation basket, reflecting swings in global oil markets and changes to domestic fuel duty policy.

Core and Services Inflation Remain Stubborn

Beneath the headline figure, underlying price pressures remain firm. Core CPI, which strips out energy, food, alcohol and tobacco, rose by 4.2% in the year to March 2024, down from 4.5% in February but still more than double the Bank of England’s goal. The persistence of core inflation is one reason officials have been wary of easing policy too quickly.

Services inflation, a metric closely watched by rate‑setters because it is more closely linked to domestic wages and demand, eased only slightly to 6.0% from 6.1%. Elevated services inflation suggests that, even as energy and goods prices normalise, domestically generated price growth remains strong—reflecting tight labour markets and robust pay settlements in sectors such as hospitality, professional services and healthcare.

Household Budgets: Relief, But Not a Reversal

For households, inflation at 3.2% still means prices are rising—just more slowly than before. After several years in which the cost of living has jumped much faster than wages, many families remain under strain. Real household disposable income per head fell sharply during the energy‑price shock and has only recently begun to stabilise, according to analysis by the UK’s Office for Budget Responsibility.

Energy bills are also lower than at the peak of the crisis, helped by falling wholesale gas prices and repeated adjustments to the government‑regulated energy price cap set by Ofgem. But accumulated price rises mean the average basket of goods and services is still significantly more expensive than it was before the pandemic. For many consumers, a slower pace of inflation feels less like a return to normal and more like a pause after a steep climb.

Market Reaction and the Bank of England’s Dilemma

The softer‑than‑expected inflation reading has sharpened speculation over when the Bank of England might begin lowering interest rates from their current restrictive levels. Investors had already pushed back expectations for the first rate cut after a run of resilient wage and services‑inflation data earlier in the year. Following the March inflation release, markets briefly scaled back those bets, with some analysts suggesting that the Bank will want more evidence that price pressures are firmly on a downward path before it acts, according to reporting by Reuters on UK inflation trends and rate expectations.

The Bank of England has raised interest rates aggressively since late 2021, lifting Bank Rate from a historic low of 0.1% to a peak above 5% in an effort to bring inflation back under control. Policymakers on the Monetary Policy Committee have repeatedly signalled that they need to see clear and sustained progress in measures such as core inflation and private‑sector wage growth before they are confident inflation will return to 2% and stay there.

How the UK Compares Internationally

Despite the recent fall, UK inflation remains relatively high by G7 standards. Euro area inflation has cooled more rapidly, falling to around 2.4% in March 2024 on the Harmonised Index of Consumer Prices (HICP), while US consumer price inflation has eased more unevenly but from a lower peak, according to data from the US Bureau of Labor Statistics. The UK’s relative outperformance on inflation during the initial energy‑price shock has, in other words, given way to an uncomfortable position in which price growth remains comparatively elevated, even as growth has stalled.

A Turning Point, Not the End of the Story

The latest inflation figures mark a clear turning point from the crisis levels of the past two years. A fall to 3.2% means the pace of price rises is now much closer to the Bank of England’s comfort zone, and the direction of travel—especially in headline and core inflation—is encouraging for policymakers, markets and households alike.

But the data also underline how far there is to go. Services and core inflation remain too high for the Bank to declare victory, while the cumulative effect of two years of elevated price growth has left living standards under pressure. For now, the drop to 3.2% offers hope that the worst of the cost‑of‑living squeeze is easing—yet the debate over when, and how quickly, monetary policy should adjust is only just beginning.