Why has inflation fallen and what does it mean for households?

16 April 2025, 12:27

UK inflation declined to 2.6 per cent last month, according to official figures.

The rate of Consumer Prices Index (CPI) inflation eased to 2.6 per cent for the month, from 2.8 per cent in February, after drops in the price of petrol and computer games.

It marks the second consecutive, monthly fall but economists have predicted it will spike higher again in April.

Here we look at what the latest inflation data means for households and the economy.

- What is inflation?

Inflation is the term used to describe the rising price of goods and services.

The inflation rate refers to how quickly prices are going up.

March's inflation rate of 2.6 per cent means that if an item cost £100 a year ago, the same thing would now cost £102.60.

It is below the 2.8 per cent inflation rate recorded in February, meaning that prices are still increasing, but at a slower rate than they previously were.

Read More: Where inflation eased in March – and where it accelerated

Read More: UK inflation falls to 2.6% as pressure grows on Bank of England to cut interest rates

- Is inflation falling for everything?

The latest figures showed that a number of key areas have seen prices fall or recent price rises slow, but not everything.

In fact, the price of clothing and footwear jumped again last month after a surprise decline in February.

Elsewhere, furniture inflation also accelerated slightly for the month.

- What made inflation slow down?

One main factor was motor fuel, with the price of both petrol and diesel falling.

The Office for National Statistics (ONS) said the average price of petrol fell by 1.6p per litre between February and March to stand at 137.5p per litre. It was down from 144.8p per litre in March 2024.

Meanwhile, diesel prices also dropped 1.6p per litre month-on-month and were down six per cent year-on-year.

The ONS also said prices in the recreation and culture sector rose at their slowest level for more than three years in March, with a 2.4% increase. This was partly driven by a fall in the cost of video games for the month.

Shoppers also saw the price of some groceries fall faster in price, with sharper drops in the price of rice, fish and jam.

- Will inflation keep falling?

Inflation is expected to rise further before it starts falling again back to the two per cent target level.

Economists have predicted it could rise to as much as 3.6 per cent in April, with the Bank of England predicting inflation will peak at about 3.7 per cent later this year.

It is then expected to remain steadily at two per cent until 2027, according to the central bank.

Also, the Government does not want prices to continually fall. It sets the Bank of England, the UK's central bank, a target to keep the inflation rate at two per cent

- Why are prices going to increase in April?

Experts have warned that inflation will rise sharply higher in April due to a mix of higher consumer bills and the impact of higher business taxes and labour costs.

"March's inflation drop is only a temporary reprieve as a hefty increase is nailed on for April, with rising energy bills and surging business costs, including higher national insurance," said Suren Thiru, economics director at ICAEW.

From April, consumers have seen an increase in the energy price cap the which will add £9.25 a month, or £111 to the annual bill of an average household.

Meanwhile, water bills will also rise after regulator Ofwat allowed firms to increase bills by an average of £86 or 20 per cent for this year as part of its five-year agreement.

Millions of households will also have seen a jump in their annual council tax bills from April 1, with most local authorities in England increasing a typical band D bill by five per cent.

- How will taxes affect the cost of living?

The Labour Government has said it is not increasing taxes for working people, so big things like income tax rates will not change next month.

However, taxes are set to rise for many businesses when a higher rate of employer national insurance is introduced.

A number of retailers and hospitality businesses have indicated that they will be forced to pass on the impact of higher costs to customers through price hikes.

This could mean people see prices in shops, from supermarkets and fashion chains to pubs and restaurants, go up.

Matt Swannell, chief economic advisor to the EY ITEM Club, said: "We expect businesses to pass on some of the increase in labour costs caused by the recent rises in employers' national insurance contributions (Nics) and the national living wage onto consumers."

- What does the rise in inflation mean for interest rates?

Typically, high interest rates are used as a method to drag on spending demand and therefore bring down inflation.

Therefore, most economists have suggested that the lower-than-expected inflation reading could prompt Bank of England rate-setters to consider reducing interest rates from their current level, 4.5 per cent, at the next meeting in May.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: "A rate cut in May seems increasingly nailed on, and the market has priced in further cuts amid concerns of an economic slowdown triggered by tariffs."

Bank of England officials will be looking for signals regarding the potential impact of President Trump's tariff policies ahead of the May meeting and how this could impact future inflation and economic growth.