UK inflation is expected to have fallen once again when official figures are released on Wednesday.
In February’s figures, the Consumer Prices Index (CPI) measure of inflation was 3.4 per cent, falling from 4 per cent in January.
A drop this dramatic is not predicted this time, but economists expect the number for March to sit at around 3 or 3.1 per cent.
Capital Economics is predictin a decrease to 3 per cent. Ashley Webb, a UK economist at the organisation, told i: “A lot of our forecast for CPI inflation to fall is due to more normal changes in prices this March following unusually large price increases last March.”
The CPI inflation figure covers price rises in the past 12 months.
Deutsche Bank Research is estimating inflation will be at 3.1 per cent.
The bank’s chief UK economist, Sanjay Raja, suggested that services inflation “will have edged down to 6 per cent,” and core inflation, which excludes volatile categories such as energy and food prices will have dropped to 4.2 per cent, from 4.5 per cent last month.
Experts then expect inflation to drop even further in April’s reading, which will be released in May.
“April data should mark a return to target, bringing headline CPI just below 2 per cent – the first reading below the Bank of England’s 2 per cent target in three years,” said Mr Raja.
He said Deutsche Bank expected inflation to pick up a little later in the year, and then “sustainably” go back to its 2 per cent target next spring.
What does falling inflation mean for interest rates?
The Bank of England tends to cut interest rates when inflation is lower. High rates are used to try to curb spending and borrowing – with the intention that this will slow price increases.
If inflation were to fall, it would be good news in this regard, but don’t expect the Bank of England to necessarily cut rates from their 15-year high of 5.25 per cent when its panel of economists meets next month.
Most forecasters think June is the earliest it will cut rates.
However, some even think a cut later in the year is more likely, especially as there are expectations that the Federal Reserve – the Bank of England’s equivalent in the US – may not enact a cut until July or later.
What does it mean for mortgages, pensions and savings?
Mortgages
Although mortgages are not directly affected by inflation, many products are affected by the Bank of England’s base rate, which is influenced by inflation.
Fixed mortgages – the most popular type – tend to work on longer-term predictions for where the base rate might go in the future, and given there have been no dramatic surprises to inflation figures in recent months, these have ticked along steadily without going dramatically up or down in recent weeks.
A fall in inflation alone will probably not be enough to send mortgage rates plummeting – because it is expected already – but a dramatic drop could bring forward predictions for when the first rate cut might arrive, which in all likelihood would then lead to rates coming down.
Savings
High inflation is bad news for savers as it erodes the value of money held in banks and building societies. Therefore, the lower the rate, the better the news for savers.
However, experts believe we are “past the peak” for savings, with all fixed rates now dropping below 6 per cent. This means it is worth taking advantage of the best deals now.
According to Savings Champion, the best easy-access account, where you can access your money freely, pays 5.06 per cent, and is from Post Office.
You can get slightly better returns if you lock your cash away for longer. The best one-year fixed account from HTB pays 5.18 per cent.
Pensions
Lower inflation will be welcomed by pensioners who have been struggling with the cost of living crisis over the past two years, especially those for whom the state pension makes up a large portion of their income.
Many received a 8.5 per cent boost to their state pension in April under the triple-lock mechanism.
If inflation falls, however, it could have negative consequences for annuities – pensions for life. Rates on annuities have gone down in recent months, and this is expected to continue.
