Inflation edges in the right direction – but too slow to inspire action

CPI inflation fell to 3.2% in March, slightly less of a drop than economists had forecast.
Prices were up 0.6% in a month (compared to 0.8% a year earlier).
It’s the lowest in two and a half years, and well down from the peak at 11.1% in October last year.
The biggest factor pushing inflation down was food, and the biggest push in the opposite direction came at the petrol pumps.

Core CPI inflation (stripping out energy, food, alcohol and tobacco) was 4.2%, down from 4.5% in February.
The CPI services rate also fell, to 6% – down from 6.1%.

What it means for annuities.
What it means for savings.
What it means for homeowners.

The ONS has released inflation figures for February: Consumer price inflation, UK – Office for National Statistics

Susannah Streeter, head of money and markets, Hargreaves Lansdown:

“Inflation in the UK has taken another welcome step towards target, but interest rate cuts remain elusively distant. The drop was widely expected but was slightly less than forecast, with prices at the pumps offsetting a slowdown in food price hikes.

Although consumer prices are heading in the right direction, it’s not just the headline rate which determines Bank of England action. Policymakers scan other data, and the snapshot of stubborn wage growth out this week continues to be a concern. Unemployment may have risen, but the labour market figures are considered unreliable, and more people out of work isn’t yet translating into a sharp slowdown in wage increases, as there’s still a fight for talent in big pockets of the economy.

Although core inflation, which strips out volatile food and fuel prices is also cooling, slowing to 4.2%, the worry is that employers could pass on higher wage bills in the form of higher prices in the months to come. It means the interest rate may stay at a painful level for even longer than earlier forecasts, with August or September being increasingly pencilled in.

Other central banks, particularly the Federal Reserve in the United States, are taking a cautious stance, staying committed to the fight against inflation. Fed chair Jerome Powell has warned that interest rates may have to linger for longer, with confidence ebbing away that the price spiral is being brought under control.”

What it means for annuities

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown:

“Inflation is now at its lowest level in two and a half years, bringing welcome relief to pensioners who have struggled to make ends meet. The 8.5% boost to the state pension that came through this month will bring some headroom to people’s budgets and help them plan ahead.

Retirees in the market for an annuity will find their decision finely balanced. Data from HL’s annuity search engine shows a 65-year-old with £100,000 can currently get £6,983 a year from a level annuity. However, with the eye wateringly high inflation we saw in recent years still looming large, many will be considering whether an inflation linked annuity is the way to go. The starting incomes from these are much lower though – an RPI linked annuity currently pays out £4,406, which could prove tricky for budgeting. Do you go for the higher amount now and risk its purchasing power being eaten away by a period of high inflation, or do you take the lower income with the promise of it increasing, but the risk it may take more than a decade to get your money back?”

What it means for savings

Sarah Coles, head of personal finance, Hargreaves Lansdown:

“Savers should be filling their boots at this news. With inflation at 3.2%, there are savings and cash ISA rates which beat inflation in every market – from easy-access to the longest fixed rate savings deals. There are still easy-access accounts and shorter-term fixed rates offering more than 5% – so they can beat it by a decent margin.

Easy-access rates have been particularly strong in 2024, despite having softened in March, with the top of the market falling 10 basis points. Meanwhile, one-year fixed rates stayed relatively steady in March, and we’ve actually seen two-year fixed rates rising.

These deals aren’t going to last forever. As inflation comes under control, banks will price in more rate cuts, and savings deals will drop. Over the past quarter, we’ve already seen savings rates fall across the board, with the largest declines occurring in the fixed term deposit space. So it’s worth getting hold of a competitive deal while you can – and checking online banks and savings platforms, where you’ll usually find the best rates.

What it means for homeowners

Over-stretched homeowners with a remortgage on the horizon will be desperate for a sign that a rate cut is around the corner. Today’s inflation figures show we’re inching in the right direction, but they’ve still got a wait on their hands.

There are still an awful lot of inflationary pressures the Bank will be keeping a beady eye on. Rising oil prices showed up in higher petrol prices in March, and over time it will feed into the price of everything that’s manufactured, transported or sold in a shop that needs heating and lighting. At the same time, wages are still rising faster than inflation, so the Monetary Policy Committee is not going to be keen to rush into anything, and the market is pricing in a rate rise no earlier than August.

The banks aren’t keen to make any sudden movements in the mortgage market. Today’s fall was smaller than expected, so is unlikely to inspire anything significant. After the cost of deals dropped quickly at the start of January, more stubborn inflation data convinced the banks they’d got ahead of themselves, and rates started creeping up again. Over the past month, the average 2-year fixed rate mortgage has stuck around 5.8%, and there’s every chance today’s figures inspires very little movement from here.

For remortgagers, and those hanging onto a variable rate while they wait for cheaper fixes to emerge, there is still hope. Over the coming months, we will see mortgage rates ease. Fixed deals will get cheaper, and they should finally see the huge pressure on their budgets start to ease. This will come as a relief. Figures from the HL Savings & Resilience Barometer shows that the average earning household has just £117 left at the end of the month, which is leaving homeowners with very little room to manoeuvre if they’re hit by the unexpected.”

George Sweeney, DipFA, financial advisor at personal finance site finder.com gives his thoughts:

“The latest inflation reading from the ONS of 3.2% (down from 3.4% in February) shows the UK remains on track in efforts to bring inflation back down to the normal target level of around 2%. This is exactly the kind of movement the Bank of England (BoE) were hoping to see in the data, because it’s expected that the final push down towards the target will be the hardest and stickiest.

This inflation data, alongside the latest wage growth figures (showing a slight decline to 6%) and the unemployment rate (bumping up to 4.2%) could provide enough signals to the BoE that the UK economy has officially cooled down. Potentially increasing the odds that a summer base rate reduction is still on the cards. The only spanner in the works is the fact that US inflation doesn’t look as promising. With the next couple of Federal Reserve rate decisions coming a week before the BoE’s, it’s going to be interesting to see if the BoE will go ahead with lowering rates, even if the same doesn’t happen across the pond.”