Inflation fell to 3.2% in the 12 months to March, down from 3.4% in February, to reach its lowest level in nearly two and a half years.

Economists had anticipated that inflation would fall to 3.1%, and it remains considerably higher than the government’s 2% target. Core inflation, which strips out more volatile food and energy prices, eased to 4.2% in March, down from 4.5% in February.

Meanwhile, the Retail Prices Index (RPI) measure of inflation, which includes housing costs, fell to 4.3% in the 12 months to March, down from 4.5% in February.

Food and non-alcoholic drink inflation slowed to 4% in March, down from 5% in February, and a recent high of 19.2% in March 2023. You can learn about ways you might be able to reduce your food bills in our guide 21 ways to save money on your food bills.

Myron Jobson, senior personal finance analyst at interactive investor, said: “While the latest reading is marginally higher than expected, inflation continues to move in the right direction with the cooling of the areas of inflation that are most felt by Britons, such as food, stoking a sense of optimism over where prices are heading.

“Things are looking up, but the last mile to the Bank of England’s 2% target may feel like the longest to Britons who have endured daily battles against rising prices.

“Barring any unforeseen developments, a steeper decline in inflation is on the cards for next month’s reading, which will factor in the fall in the Ofgem Energy Price Cap, which is expected to drive inflation below the 2% target level.

“While the cost-of-living squeeze on personal finances continues to ease, the battle against inflation is not yet won. This reality, in tandem with the risks of higher-for-longer interest rates, underpins the importance of keeping a keen eye on your finances and making the necessary adjustments to maintain financial resilience. Remember, falling inflation doesn’t mean that prices are falling, but that, on average, they aren’t climbing as quickly.”

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What inflation means for you

High inflation increases the cost of our general living expenses, making it even harder for those on low incomes to make ends meet, so news that it is edging closer towards the government’s 2% target is welcome.

The good news is that salaries are still outstripping the rate of inflation, with pay, excluding bonuses, growing by 6.% in the three months to February 2024.

Inflation and your pension

Although inflation falling to 3.2% in March is dominating current headlines, it is actually September’s inflation rate that is often considered most important. That’s because the increase in prices over the year to this point is usually used to calculate the rate at which certain allowances and benefits, including the State Pension, are increased the following April.

Under the ‘triple lock’ guarantee, the State Pension is guaranteed to rise by the highest of September’s inflation figure, earnings growth, or 2.5%. Soaring wages outstripped inflation, which meant that the State Pension rose by 8.5% this April. You can find out more about this in our guide What is the pension triple lock?

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: ““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?”

You can find out more about how different types of annuity work in our guide Annuities explained and about while it’s vital to do plenty of research before buying one in our guide Why it pays to shop around for your annuity.

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What does it mean for interest rates?

The Bank of England raised the base rate fourteen consecutive times since December 2021 to try to dampen inflation, but the Bank’s Monetary Policy Committee decided to leave rates unchanged again at 5.25% in March as inflation eased.

Alice Haine, personal finance analyst at BestInvest by Evelyn Partners, the wealth manager, said: “The latest inflation data will be a relief for buyers and those looking to remortgage hoping for interest rate cuts. But what’s causing them a headache is the uncertainty of when rate cuts will actually happen. In January, mortgage rates eased dramatically as the prospect of rate cuts this year lured buyers back to the market following a rocky 2023. However, the ‘higher for longer’ rhetoric of late has seen average two and five-year fixed rates scuttling in the opposite direction between the start of March and April.

“While this presents buyers and those looking to refinance with a quandary – either they pause buying plans in the hope borrowing costs ease later in the year or accept a higher rate now
– remember, borrowing costs may seem high relative to the pre-tightening cycle instigated by the BoE in December 2021, but fixed rates are significantly lower than they were six months ago.

“If inflation continues to ease and a summer rate cut becomes a reality, this will deliver a big boost to first-time buyers looking to get onto the property market and homeowners about
to roll off a fixed-rate deal. However, existing homeowners on long-term products secured before the BoE began its aggressive rate-hiking cycle in December 2021 are likely to face higher repayments as mortgage rates will still be significantly above the level
they were when they took out their current deal.

If you’re worried about a potential payment shock when your current mortgage deal ends, read our articles When is the best time to remortgage? And Are you one of 1.6m homeowners facing a mortgage timebomb?

Impact on savers

Falling inflation benefits savers as it makes it easier to generate real returns, although the top rates have started to be pulled from the shelves in recent weeks. If you’re trying to save so that you have a financial buffer in place to cover rising costs, our articles How to build an emergency fund and Best instant access savings accounts may come in handy.

Mark Hicks, head of active Savings at Hargreaves Lansdown, said: “Falling inflation is great news for savers, when you look at the return they’re getting on cash after inflation. With inflation at 3.4%, and savings and cash ISA rates as high as 5% on the best variable and short-term fixes, it’s now possible to beat inflation by a decent margin.

“The fly in the ointment is that when the market starts to see inflation under control, it will price in lower interest rates and savings deals will drop. However, we are in a golden period between the two, so it’s worth getting hold of a competitive deal while you can. It’s still as important as ever to track down a better deal from a newer online bank, building society or savings platform.

“The rates on one-year fixed term deposits have risen the most over the past four weeks, and these products are still offering the highest rates across the savings curve. Not only that, but they lock in the deals available before the market starts to reprice to take account of falling Bank of England rates. If you don’t need a chunk of your savings for a year or longer, it’s well worth considering a fixed rate deal right now.” Current high savings rates come with risks of their own, however, as more people may unwittingly breach their annual Personal Savings Allowance. First introduced in 2016, when savings rates were much lower than now, the allowance has remained frozen since then with basic rate taxpayers entitled to £1,000 tax-free cash interest on savings outside of ISAs and those paying the higher 40% income tax rate awarded a £500 allowance. For additional rate taxpayers subject to 45% income tax, there is no Personal Savings Allowance at all. You can read more about the Personal Allowance in our guide What is the Personal Savings Allowance?

You can learn more about inflation and the impact it has on your finances in our guide What does inflation mean for my money? If you’re looking for ways you might be able to reduce your outgoings, read our articles How to save money – 21 money saving tips and Seven ways to save on your household bills.

Free financial support services

Millions of people are struggling financially at the moment, and although inflation is easing, many are still finding it difficult to manage their outgoings.

If your debts are starting to spiral out of control, contact Citizens Advice to help you find a way forward. You can speak to an advisor through its national phone service Adviceline on 0800 144 8848 if you’re in England, 0800 702 2020 if you’re in Wales, 0800 028 1456 if you’re in Scotland and 0808 223 1133 if you’re in Northern Ireland. Alternatively, contact any of the following specialist debt advice charities:

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