Inflation in the UK economy continues to weaken. In March 2024, “all items” inflation was 3.2% year-on-year, by the CPI method, down slightly from 3.4% in February. This is the lowest level in two and a half years.

“Utilities” and “motor fuels” are making a negative contribution to inflation (i.e. prices in these areas are now lower than they were a year ago, pushing inflation down).

However, “services” are making a very large positive contribution, probably because wage growth remains quite high.

Average wages in the UK are up around 5.5% year-on-year so, although wage growth is slowing, wage growth has exceeded inflation for 8 months, allowing at least some workers to rebuild their spending power.

Food and drink inflation was 4.0% year-on-year in March, a sharp drop from 5.0% the month before. This remains a little below IGD’s most recent forecast.

Inflation in this market is easing across a broad front but meat and cereal products are having the greatest statistical effect, as lower commodity prices begin to feed through to shoppers.

IGD Viewpoint
News that inflation is weakening is welcome, but it should be noted that inflation remains above the government’s target rate of 2.0%, plus or minus 1.0%.

This means that the Bank of England’s Monetary Policy Committee (MPC), which is responsible for keeping inflation within these bounds, is likely to maintain fairly tight policy for at least a little longer.  

It is still to be seen how soon the MPC feels confident enough that inflation is under control to merit a reduction in interest rates. The Governor of the Bank of England has stated “Our judgement with interest rates is ‘how much do we need to see now to be confident of the disinflation process.”