The Consumer Price Index (CPI) is the main measure of inflation and it shows how the prices of goods and services have changed over time
UK inflation fell to 3.2% in the 12 months to March to its lowest annual rate for two-and-a-half years.
This is down from the 3.4% that was recorded in February as inflation continues to edge closer to the 2% target needed by the Bank of England. The Consumer Price Index (CPI) is the main measure of inflation and it shows how the prices of goods and services have changed over time.
But despite another inflation drop, prices aren’t going down – they’re still going up, just at a slightly slower pace than before. We explain what inflation represents and why it’s falling.
The latest inflation fall was largely due to food prices slowing sharply, according to the Office for National Statistics (ONS).
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.”
What is inflation?
The ONS uses a “basket of goods” and services to measure price rises. The “basket of goods” is regularly updated to reflect current trends, with vinyl records and air fryers added in 2024, and hand sanitiser taken out.
The ONS releases the latest inflation data every month. If something cost £1 last year and the price of that item now is £1.03, then the rate of inflation is 3%. But the main CPI figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this.
How is inflation linked to interest rates?
The Bank of England has been trying to lower inflation by increasing its base rate. The base rate influences the interest rate you’re offered by banks and lenders – so when it is higher, borrowing becomes more expensive and this means people have less money to spend elsewhere.
When people spend less money, this brings down demand and lower prices, which should then lower inflation. But a higher base rate has pushed up mortgage payments for millions of homeowners, leaving households financially stretched.
Higher borrowing costs also risks damaging the economy. The base rate stood at just 0.1% in December 2021. It is now at 5.25% and has been held at that level for the last five Bank of England meetings. The next base rate decision is due on May 9.
Why is inflation falling?
Inflation peaked at 11.1% in October 2022. It began to rise in 2021 largely due to higher costs of energy and food. Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine.
The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.
Will inflation keep falling?
The Bank of England expects inflation to drop “slightly below” its 2% target by the summer. However, policymakers will be looking to keep inflation under control and maintain this level before any rate cuts are announced.
