UK inflation dropped to 2.6 per cent in March ahead of an expected rise in April as households begin to pay higher council tax and utility bills.
Last month’s reading came in belowCity forecasts of a fall to 2.7 per cent. It comes after the consumer prices index fell in February to 2.8 per cent, down from 3 per cent in January.
The Office for National Statistics (ONS) said falling fuel prices and slowing increases in the cost of a night out drove inflation lower, although this was offset by price rises for clothing and footwear.
The price of food was also a factor in dragging down prices growth after it was flat in March compared with rising prices in the same month last year.
The chancellor, Rachel Reeves, said, “Inflation falling for two months in a row, wages growing faster than prices and positive growth figures are encouraging signs that our plan for change is working, but there is more to be done.
“I know many families are still struggling with the cost of living and this is an anxious time because of a changing world. That is why the government has boosted pay for 3 million people by increasing the minimum wage, frozen fuel duty and begun rolling out free breakfast clubs in primary schools.”
However, former BoE interest rate-setter Michael Saunders said that this is very much the calm before the storm, pointing to April's increases in gas, electricity and water prices, alongside higher taxes on employers, which could push inflation to 3 per cent.
"And we'll start to see the effects on the economy of Storm Donald with the Trump trade wars," Saunders told BBC radio, adding that inflation was now likely to peak below the BoE's most recent forecast of 3.7 per cent in the third quarter this year, but the cost would be a hit to economic growth.
Martin Sartorius, principal economist at the Confederation of British Industry, said the higher US tariffs could put both upward and downward pressures on inflation in the UK, but the BoE was likely to cut interest rates next month.
Hamish Martin, Partner at LAVA Advisory Partners, said, "Inflation dipping again is encouraging, especially for those of us operating in the lower mid-market where rate movements meaningfully impact deal appetite.
"With interest rate cuts looking more likely in the medium term as well, there’s a creeping sense of cautious confidence among buyers, so cheaper debt and improved visibility on the cost of capital could prompt a bit more urgency in getting deals done this side of summer.
"It’s a more constructive environment for both sides of the table, especially for owners looking to exit while multiples remain attractive, so we’re hopeful it means a surge of exciting activity over the warmer months."
Before US president Donald Trump’s tariff announcements, several analysts had predicted that inflation would start rising from April onwards, peaking at about 4 per cent over the summer before falling back next year.
However, the Trump's trade war has cast doubt on those forecasts for CPI, which could peak at a lower rate if China is allowed to dump goods in Europe that were previously destined for the US.
