What falling inflation means for you: CPI eases to 2.8% - what happens next?

Inflation cooled to 2.8 per cent in March, a sharper fall than expected, according to figures from the Office for National Statistics.

What's the latest on inflation?

The headline inflation rate eased to a 14-month-low, driven by lower energy prices, beating analysts’ expectations of 3 per cent.

Core inflation was softer, falling from 3.1 per cent to 2.5 per cent, while services inflation eased from 4.5 per cent to 3.2 per cent.

Housing and household services, which include energy, plunged from 5.3 per cent to 1.4 per cent, as the Government’s energy bill support package reduced variable and fixed tariffs.

ONS chief economist Grant Fitzner said: ‘Smaller rises in water and sewage bills and Vehicle Excise Duty than seen last year also helped pull the rate down.’

Meanwhile prices for food and non-alcoholic beverages fell from 3.7 per cent to 3 per cent, driven by chocolate and meat products, while the price of package holidays drove the headline rate down further.

This was partially offset by higher raw materials costs, driven by higher oil and petrol prices.

What does the inflation rate mean for you?

Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.

Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent.

An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent.

Higher inflation means the rate of increase in the cost of living is increasing.

Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation - delivering a real increase in people's wealth.

The main measure by which the Bank of England seeks to control inflation is interest rate rises. Higher inflation decreases the chance of base rate cuts and increases expectations of how high rates will go.

Expectations that the Bank of England would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.

Will inflation rise again?

The decline in the headline inflation rate is expected to be temporary, before the headline rate ramps up again once the further effects of the Iran war feed through to prices.

Oil and petrol prices have soared but this has been largely limited in its impact, but is likely to spread into goods and food, pushing the headline rate much higher.

Andrew Wishart, senior UK economist at Berenberg and Peel Hunt’s chief economist Kallum Pickering, both expect CPI to rise to over 3.5 per cent in the second half of the year.

James Smith, UK economist at ING expects inflation to peak just below 4 per cent.

While households have thus far been protected from higher energy prices, the energy price cap is expected to rise by 13 per cent on 1 July.

While inflation will peak over summer, ‘we do not expect to see significant spillover or second-round effects – unlike in 2022,’ says Pickering.

Pantheon Macroeconomics economist Rob Wood cut a more pessimistic tone, with most of the downward drivers of April’s rate ‘in erratic components that will rebound.’

Will the Bank of England raise interest rates?

The fall in April inflation may only be temporary, but it eases pressure on the Bank of England to raise rates at its June meeting.

Economists are largely in agreement that the central bank will hold interest rates next month, but the outlook beyond that is murkier.

Yael Selfin, chief economist at KPMG says that the easing in prices ‘effectively closes the door on a potential rate hike at the June meeting, with the Bank likely to wait for clearer evidence of a renewed pickup in domestic inflation’.

Money markets are pricing in at least one interest rate hike this year, and Rob Wood of Pantheon Macroeconomics expects the MPC to hike rates in July as inflation picks back up again.

Peel Hunt says the current stream of data is unlikely to push the Bank to raise rates, instead sticking to its call for a hold over the summer, before cutting twice in the final quarter once price pressures subside.

‘Unlike following the 2022 Russian gas shock, when the BoE tightened policy aggressively to curb escalating inflationary pressures, the current domestic environment is characterised by softer aggregate demand, less underlying inflation momentum, and tighter financial conditions,’ it said.

What does it mean for your savings?

Rising inflation will quickly erode the real value of people's savings.

Harriet Guevara, Chief Savings Officer at Nottingham Building Society, said: 'For savers, the challenge is that while inflation has eased from previous highs, it is still continuing to push up the cost of everyday essentials.

'At the same time, money held in low-interest accounts could see its spending power gradually reduced over time, making it important for households to ensure their savings are working as hard as possible.'

What does it mean for your mortgage?

Markets will be repricing their interest rate expectations for the year, with some expecting a rate hike later this year. However, this morning's data increases the likelihood of the Bank of England holding rates.

Samuel Fuller, director of Financial Markets Online says: 'The rate of inflation was expected to hold firm when compared with the jump that occurred last month, so an easing led by lower utility costs will be welcome. However, the ongoing conflict in Iran seems no closer to resolution and has been driving market anxiety that higher rates of inflation are here to stay.

'That in turn raises an expectation that interest rates will have to remain higher for longer. Mortgage rates have already reacted to that, and fixed rates are elevated compared to only a few months ago when further base rate cuts, not rises, seemed just round the corner.

'The peak of the initial spike in fixed rates has now eased and many lenders have made more than one cut to their rates in the last month.'