When will UK inflation rate fall? How much CPI should go down by, what it means for your money explained

The Bank of England hiked interest rates for a 12th consecutive time on Thursday (11 May) in a bid to combat soaring inflation.

The UK’s central bank hiked its base rate to 4.5% - its highest level since the depths of the last financial crisis 14 years ago, which could stay with us for a while, according to the latest thinking. It means mortgage rates are set for a hike, although savings should get more lucrative.

It comes after UK inflation remained close to near-record levels in March 2023. According to the Consumer Prices Index (CPI), a measure of inflation that’s used all over the world, the rate of price rises in the economy hit 10.1% last month. This marked a 0.3 percentage point drop on the previous rate of 10.4%.

While inflation fell, it unexpectedly remained in double-figures. It means our purchasing power is being eroded at a rapid rate. The rate has continued to rise for food prices, with the average cost of a typical shop now 19.1% above where it was in March 2022. NationalWorld data analysis has shown inflationary pressure particularly has been felt in supermarket value ranges over the last 12 months.

But can we expect inflation to fall this year - and, if so, how much by?

Will inflation fall further?

While inflation has already fallen slightly, it still remains close to the record high of 11.1% recorded in October 2022. Experts had predicted it would fall to a single-figure percentage in March.

But inflation should fall away considerably over the next 12 months. The reason why is the mechanics of how the headline rate is calculated.

When we talk about an inflation rate of 10.1%, what we are saying is that a product that cost an average of £1 a year ago now costs around £1.10. This is a high rate of inflation.

A healthy rate is deemed by the Bank of England to be around 2% year-on-year. This figure means it’s low enough that wages can realistically keep up with price hikes, but high enough to encourage spending today to avoid price rises tomorrow.

Given the Bank of England has been hiking interest rates to reduce the rate of price rises to this level, while the government has hiked the UK tax burden significantly, it is highly unlikely that inflation will be able to go up. As Professor David McMillan, a finance expert from the University of Stirling, told NationalWorld in January 2023, these factors should mean “people have less money to spend”, thus reducing demand.

He added: “Inflation is measured as the change in prices between two points. There are various reasons why inflation increased through 2022, but the dominant one is the war in Ukraine. [It] led to increases in oil and gas prices, among others. This then fed through into a whole range of other prices as they are basic commodities used throughout the economy.

“That same percentage change will not happen between 2022 and 2023. As such, the rate of inflation will come down given its method of calculation. Prices will still be higher (inflation would have to be negative for prices to fall) but the rate at which they are rising is less - that is, unless another large shock happens, such as the escalation of the war.”

In short, given inflation either has been in or close to double-digits since April 2022, it would take a seriously disruptive event for it to remain as bad as it has been. But, as Professor McMillan said, while lower inflation should mean the cost of living crisis is easing, it will not mean that prices are falling. Indeed, the current rate of 10.1% should be seen as being in addition to March 2022’s rate of 7%.

How much will inflation fall by?

Predictions about how much inflation will fall in the short-term are tough to make at present. We saw an unexpected increase in February and a lower than expected decrease in March, when markets had expected the CPI to fall to 9.8%. Although a move out of double-digits would have been more symbolic than meaningful - given 9.8% is still an extremely high inflation rate - it demonstrates the current unpredictability of the UK’s economy.

But experts do expect a sharp fall in the next set of data for April 2023, which is set to be released in under two weeks’ time. This is because of what happened in April 2022, when the CPI jumped two percentage points to 9% as a result of a huge increase in the Ofgem energy price cap and other big bill hikes.

According to the Bank of England’s latest forecast from May, inflation should fall back to around 5.1% by the end of 2023. It is then expected to decline below 2% - the level at which inflation is deemed healthy - by the start of 2025.

Separate analysis by financial services giant ING in April said, the headline CPI should fall to around 8% for April, 5% by the summer and 3% by the end of 2023. Another forecast, published by the Office for Budget Responsibility in the aftermath of the Spring Budget in March, predicted inflation would hit 6.9% by June and 2.9% by the end of December.

The big unknown is whether inflation will continue to be stickier than expected. The Bank of England blames this phenomenon on wage increases, but others - like the IPPR think tank - put it down to ‘greedflation’, which it defines as above inflation price hikes.

What will falling inflation mean for me?

Until inflation falls to the low single-figures and stays there, you’re unlikely to notice much of a difference with your personal finances for a while yet.

Prices will remain relatively similar - perhaps with the exception of energy, which is meant to see significant price drops over the coming months, and fuel, which is already going down in price. Wages will have to catch up with the CPI rate before your spending power will get back on a par with where it was before the cost of living crisis.

If inflation continues to reduce at a slower pace than expected, it could mean more interest rate hikes will be in the offing. Markets are currently pricing in another two hikes for this year, which could take the Bank of England base rate to 5%. Even if it falls marginally in 2024, costs could remain elevated for at least the next two years.