What is the UK inflation rate 2024? ONS February CPI and RPI explained - impact on cost of living & mortgages

The UK inflation rate dropped to a two-and-a-half year low in March 2024, the latest Consumer Prices Index (CPI) from the Office for National Statistics (ONS) has shown.

The annual rate of price rises fell to 3.2%, the lowest level since September 2021, however this was still slightly higher than economists expected. Financial markets pushed back expectations for interest rate cuts after the figures amid concerns over persistence in services and wage inflation.

This was mainly due to a significant drop in food prices, which are at their lowest level for more than two years. 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.”

Ian Stewart, chief economist at Deloitte, commented: “Inflation is in retreat but the Bank of England cannot yet be sure that it is beaten. Headline inflation is likely to drop below 2% in the coming months, but to be confident it will stay there wage pressures need to ease. With earnings growing at close to 6%, and the economy reviving, the Bank will be in no hurry to cut interest rates.”

Rishi Sunak jumped on the drop to declare “our economic plan is working”. The Prime Minister said: “Today’s figures show that after a tough couple of years, our economic plan is working and inflation continues to fall. Having been 11% when I became Prime Minister, it’s now fallen to just over 3%, the lowest level in two-and-a-half years. We have also seen energy bills falling, mortgage rates falling and, just this week, data showed people’s wages have been rising faster than inflation for nine months in a row.”

Labour's Shadow Chancellor Rachel Reeves said: “After 14 years of chaos and uncertainty under the Conservatives working people are worse off. Prices are still high, the tax burden is the highest it has been in 70 years and mortgage payments are going up. Now Rishi Sunak is putting forward a reckless £46 billion unfunded tax plan to abolish National Insurance that would risk crashing the economy and re-running the disastrous Liz Truss experiment. Britain cannot afford another five years of this failed Conservative government. It’s time for change and it’s time for Rishi Sunak to set the date for the election.”"

Core inflation - a measure of price rises that strips out categories which tend to rise and fall a lot, like food and energy - remains higher at 4.2%.

So, what exactly does the ONS CPI for March 2024 mean for you - and what does it mean for the cost of living crisis and mortgages?

What does inflation mean?

Inflation is an economics measure that shows how much the price of goods and services have risen over a set period of time. In the case of the CPI, the headline time period used is a year - so the figure of 3.2% means prices are 3.2% higher on average than they were in February 2023.

Put another way, the current rate means that something that cost an average of £1 last July is now over 3p more expensive on average. If you go back to March 2023, when inflation stood at 10.1%, a product priced at £1 was 10p pricier. Although this perhaps doesn’t sound too bad, if you scale it up to what is now a £60 supermarket shop, you were likely to be paying just over £51 for the same basket of food and drink two years ago.

ONS chief economist Grant Fitzner explained: "In terms of overall inflation trends, I think it’s worth pointing out that obviously prices are still going up, they’re still higher than they were a year ago or two years ago, (but) the rate of inflation has come down markedly."

So, this year’s figure has built on what was already a large increase in prices last year. Even though the latest figure has gone down, it still means prices are continuing to rise rapidly on average. At the same time, wages have only just managed to keep pace with the rate of price hikes.

It is also key to note that the inflation rate is an average for the UK economy. Some average prices in individual categories have risen well above the rate of inflation. For example, the inflation rate for olive oil has been a whopping 41.5%.

All western countries use inflation to track how their economies are performing. If the rate is high - as it currently is - it means the cost of living is likely to be rising for people across the UK, which means the value of money is likely to be decreasing. Put simply, the pounds in our pockets aren’t stretching as far as they used to.

At its most basic level, Inflation is influenced by supply and demand. If demand outstrips supply, prices are likely to go up. There are several factors that reinforce this dynamic, the most important of which include:

• Oil prices: higher oil prices make goods more expensive because it costs more to get them from A to B
• Energy prices: higher energy prices make it more expensive to produce goods and services
• Wage increases: the Bank of England says above-inflation pay rises can embed price hikes as they can maintain high levels of demand
• Government policies: major tax hikes can see spending fall, which can reduce prices

The ONS publishes updates on the UK inflation rate every month. These figures have been in the news a lot over the past year because inflation has been climbing at a steep rate - although it is now coming down again.

Why is inflation high?

There are several big reasons for why inflation has been so high. These include:

• The war in Ukraine: global food prices have been driven up as Ukraine is a major producer of important ingredients, like grain and sunflower oil.
• Sanctions against Russia: western sanctions against Russia and retaliatory sanctions from President Vladimir Putin have thrown energy and fuel supplies into doubt. This has sent global prices soaring as Russia is a major source of oil and gas (and the UK is especially reliant on imported gas).
• Global post-Covid recovery: after countries restarted their economies in the wake of Covid-19 lockdowns, demand for fuel and energy surged - this started the inflation crisis but is now no longer present in the inflation data.
• Brexit: the UK’s exit from the EU has created supply chain bottlenecks, reduced the supply of some goods and increased the country’s vacancy rate (which can drive wages higher as employers compete to recruit staff).

A lot of the reason why inflation has been falling, particularly in the last few months, is that most of these price hike drivers have dropped out of the data (largely because inflation is an annual measurement and their respective price shocks happened more than 12 months ago). The one that economists believe is continuing to linger in our data is Brexit.

What are CPI and RPI?

The ONS has two main measures for inflation - the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). The CPI has been the official measure since 1996 and is calculated using a typical basket of goods and services that the UK frequently consumes.

This basket is weighted so that goods that are important to most households, like milk, have a greater influence over the headline inflation figure than luxuries, such as smart watches.

The September CPI is used by the government to determine levels of state support, including benefits and the state pension, which then kick in from the following April. However, ministers are not legally bound to raise these national payments in line with inflation in this way.

CPI inflation also allows economists to make international comparisons. Over the last year, the UK has been one of the worst-hit countries in the Western world.

However, the rate is not a perfect indication of inflation in the UK as it omits some key costs. For example, council tax - which was once again hiked by almost 5% for millions of households in April - is not included in the CPI. It also does not include disparities between different socioeconomic groups (more on that below).

RPI was the official yardstick for inflation during the 20th century, and is now calculated so that the UK can see how current rates compare historically. But it is still used to determine how prices should change for important things like train tickets and phone contracts.

It tends to track higher than CPI because it includes mortgage interest payments. This means it is impacted by house prices, which have been rising for many years - especially in 2022. The RPI for March 2024 fell from 4.5% to 4.3%.

What does current inflation mean for cost of living?

Whichever yardstick is used, both the CPI and RPI show that the UK cost of living has generally become much more expensive over the last 12 months. Prices have been climbing at such a steep rate that wages have largely not kept pace, which means we all have less disposable income. And with the real-terms value of the pound having dropped, our savings have also been eaten into, which means anyone saving up for a deposit on a house is

According to progressive think tank the Resolution Foundation, the situation is even worse for the UK’s poorest tenth of households as they have seen inflation that is 2% higher than that experienced by the tenth richest households. People on lower incomes are more adversely affected because they spend a greater proportion of their money on necessities, like food and energy. The think tank estimates food costs make up 14% of a poorer household’s income, compared to 9% for a richer household.

In the latest data, food inflation slowed down again to 4%. The fact that wages are growing, combined with high core inflation and rising services inflation, means interest rate-related costs stay high. The Bank of England has a target of keeping the country’s inflation to 2% - something it manages using these rates.

Keeping inflation at 2% is viewed as a good thing by many economists, as they believe it encourages people to spend what they have today, rather than see it go up in price tomorrow. If the Bank believes inflation is likely to remain elevated due to the factors above, it will continue to hike interest rates. The base rate is currently at 5.25%.

What will the impact be on mortgages?

As inflation has a knock on affect on the Bank of England's base rate, it also has an impact on mortgage rates. Around 1.6 million homeowners are due to come off their fixed-rate deals this year, and will be looking at an significant increase in monthly payments. Lenders did slash rates at the start of the year as part of a price war, however many have now pulled their lowest offers.

Economics Expert, Prof Andrew Angus at Cranfield School of Management, said that the Bank of England would be reluctant to cut the base rate too quickly. “The slight dip in inflation today (17 April) provides some welcome relief from the pressures which saw the economy slip into recession last year,” he said. “Consumers have continued to bear the weight of rising costs, but this gentle decline in inflation is a sign that the economy is stirring.

“Despite this, the Bank of England is likely to remain cautious on interest rates. There is still a myriad of factors that will affect inflation. Recent heavy rain, for example, might see food prices increase in the short term. It’s a reminder that dealing with inflation is like giving a vaccine: the injection may continue to sting for consumers, but it’s the shot in the arm the economy needs in the long-run.”

George Sweeney, financial advisor at finder.com, was more confident. He explained: “This inflation data, alongside the latest wage growth figures - showing a slight decline to 6% - and the unemployment rate (bumping up to 4.2%) could provide enough signals to the Bank of England that the UK economy has officially cooled down potentially increasing the odds that a summer base rate reduction is still on the cards.

“The only spanner in the works is the fact that US inflation doesn’t look as promising. With the next couple of Federal Reserve rate decisions coming a week before the Bank of England’s, it’s going to be interesting to see if the BoE will go ahead with lowering rates, even if the same doesn’t happen across the pond."

And Nathan Emerson, CEO of Propertymark, said: “It is encouraging to see that inflation is starting to decline towards the same levels it was at prior to the Covid-19 pandemic. People will be relieved to start experiencing some normality again without fearing that prices will rise at almost unaffordable levels.

“When the Bank of England meets in May, we may see them begin to have the confidence to gradually cut interest rates in order to stimulate activity on the housing market during spring, traditionally one of the busiest times of the year for the housing market, especially when Propertymark’s own Housing Insight Report found that there has been an 18 per cent increase in new properties coming to the market. already.”

Ralph Blackburn is NationalWorld’s politics editor based in Westminster, where he gets special access to Parliament, MPs and government briefings. If you liked this article you can follow Ralph on X (Twitter) here and sign up to his free weekly newsletter Politics Uncovered, which brings you the latest analysis and gossip from Westminster every Sunday morning.