The rate of inflation has dropped to 3%, the lowest level since March last year.
The figure will boost the case for an interest rate cut when the Bank of England meets next month
The core measure eased from 3.5% to 3.3%.
The decline in the inflation rate was quite broad-based as goods inflation fell from 2.2% to 1.6% and services edged down from 4.5% to 4.3% while heavier discounting than usual from retailers’ and the exclusion of private school VAT from annual comparisons have also had an impact.
Matthew Allen, Lecturer in Economics at the University of Salford, said:
The fall in inflation to 3%, the lowest rate in 10 months, will be welcomed by households and businesses alike. Much of the decline appears to be driven by lower transport costs, particularly airfares, which are typically volatile and influenced by seasonal demand and energy prices.
However, it’s important not to overstate the improvement. Food prices and hotel costs remain elevated, and these are everyday expenses that consumers feel most acutely. For many households, particularly those on fixed incomes, the cost-of-living pressure hasn’t disappeared, it has simply softened.
For consumers, this latest data offers some psychological relief. Wage growth has recently been outpacing inflation, meaning real incomes are beginning to recover. That should support modest improvements in confidence and discretionary spending. However, households are still cautious, especially given high mortgage costs.
For businesses, particularly in hospitality and retail, the data presents a mixed picture. Lower inflation eases input cost pressures and supports consumer demand, but elevated food and service costs suggest margins may remain tight in certain sectors. Firms will continue to face wage pressures, especially where labour markets remain relatively tight. The latest unemployment rate of 5.2% suggests some cooling in the labour market. That slight easing in labour tightness may gradually reduce upward wage momentum, but it is unlikely to remove cost pressures overnight.
The key question now turns to interest rates. With inflation trending downward but still above the Bank of England’s 2% target, policymakers will likely remain cautious. While this data strengthens the case for a rate cut later in the year, I suspect the Bank may hold rates at 3.75% in the near term to ensure inflation is firmly on a sustainable downward path.
The Monetary Policy Committee will want clear evidence that underlying inflation, particularly in services, is easing before acting. Premature cuts risk reigniting price pressures, something policymakers are keen to avoid after the volatility of recent years.
In short, this is positive progress, however, unemployment rate is concerning especially for young people aged 16-24 years old. The Bank of England and the government will be watching this closely, so not yet mission accomplished.
