Inflation rose to 3.3 per cent in March, in line with expectations, according to figures from the Office for National Statistics.
The Consumer Prices Index (CPI) rose from 3 per cent to 3.3 per cent as the impact of the Iran war started to feed through to the economy.
Core CPI, which excludes energy, food and alcohol, was 3.1 per cent, down from 3.2 per cent in February, but services inflation jumped from 4.3 per cent to 4.5 per cent.
What do the latest inflation figures mean for you, where does this leave the Bank of England on interest rate hikes, and will inflation stay at a higher rate? We look at all this and more.
Weekly shop: High inflation has hit our household bills in recent years, from energy to food
What’s the latest on inflation?
The headline inflation rate rose in line with economists’ expectations as the energy price shock seeped into motor fuel prices – which added 0.33 percentage points to CPI.
Core inflation was softer, falling to 3.1 per cent, but the Bank of England will take little comfort in another rise in services inflation to 4.5 per cent.
Prices for clothing and footwear dipped by 0.8 percentage points in March, compared with a rise of 0.9 per cent in February, as consumers tightened their belts. Economists also suggest the discounting could be a hangover from February’s unusually wet weather.
Food and non-alcoholic drink inflation surged to 3.7 per cent, from 3.3 per cent in February.
ONS Chief Economist Grant Fitzner said: ‘Inflation climbed in March, largely due to increased fuel prices, which saw their largest increase for over three years.
‘Airfares were another upward driver this month, alongside rising food prices.
‘The only significant offset came from clothing costs, where prices rose by less than this time last year.
‘The monthly cost of both raw materials for businesses and goods leaving factories rose substantially, driven by higher crude oil and petrol prices.’
What does the inflation rate mean for you?
Consumer prices inflation, known as CPI, measures the average change in the cost of consumer goods and services purchased in Britain, with the ONS monitoring a basket of goods representative of UK consumers.
Monthly change figures are given but the key measure that is watched is the annual rate of inflation. The Bank of England has a target to keep this at 2 per cent.
An inflation spike has hit over the last two years or so, with the CPI rate peaking in October 2022 at 11.1 per cent.
Higher inflation means the rate of increase in the cost of living is increasing.
Any decline in the inflation rate is to be celebrated though, as it increases the chance of wages, investment returns and savings interest matching or beating inflation – delivering a real increase in people’s wealth.
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The main measure by which the Bank of England seeks to control inflation is interest rate rises. Higher inflation decreases the chance of base rate cuts and increases expectations of how high rates will go.
Expectations that the Bank of England would have to keep raising rates to combat inflation have sent mortgage rates spiralling costing mortgaged homeowners dear.
> How much would a mortgage cost you? Check the best rates
Will inflation rise again?
The increase in the headline CPI rate was largely expected as the Iran war has caused a huge energy price shock and disrupted supply chains.
The good news is that inflation did not exceed market expectations, but it is still much higher than the 2 per cent target.
Rising energy prices caused by the war now puts inflation on an upward trajectory but how far it rises will depend on developments in the Middle East.
Martin Beck, chief economist at WPI Strategy forecasts inflation to peak at around 3.5-4 per cent this summer if tensions ease and energy supplies normalise. But any escalation could ‘easily push’ inflation towards 5 per cent.
Ofgem’s energy price cap, which is based on the average gas and electricity prices over a three month period, is set to rise again regardless in July which will push up the headline rate.
However, the increase in energy prices has been more modest than in 2022 and the labour market is softer.
‘All of this suggests that the primary impact of higher energy prices now is likely to be weaker growth rather than a sustained surge in inflation,’ says Beck. ‘The inflation spike should prove temporary at the cost of softer activity and a gradual rise in unemployment.’
Luke Bartholomew, deputy chief economist at Aberdeen added: ‘Certainly inflation expectations are likely to remain elevated, but with the labour market and broader economy relatively weak, it is hard to see workers and firms having much power to gain higher wages and push through higher prices in response.
‘That should ultimately limit the size and extent of the coming inflation shock.’
The closely-watched food inflation figures came in higher. Rob Wood, Pantheon Macroeconomics’ chief UK economist expects this to ‘slow gradually in the first half of the year before reaccelerating as higher energy and fertiliser costs boost prices.’
Will the Bank of England raise rates?
The Bank of England is in a difficult position as inflation is likely to remain elevated for some time, meaning it is unlikely to cut rates soon.
Markets now expect the Bank to hold rates or even raise them this year to combat higher inflation, but the current level ‘is not high enough to scare the MPC into hiking rates imminently,’ says Pantheon’s Wood.
James Smith, ING’s senior UK economist says the latest CPI reading ‘tells us virtually nothing about the scale and duration of the inflation wave to come.’
Grim faces: The Bank of England is likely to hold the base rate next month after CPI reading
The dilemma for the central bank is whether it looks through a temporary rise in inflation or whether it will tighten policy.
‘A prolonged period of policy on hold looks the most likely outcome,’ says Beck, ‘leaving the economy exposed to the trajectory of the conflict and its impact on energy markets.’
Smith adds that against a fragile jobs market, he does not expect a rate hike next week or this year.
Others believe the Bank will be more cautious. ‘On the one hand, rising energy prices will add to inflation over the rest of the year. However, the labour market is broadly in balance, so second round inflation effects are likely to be relatively muted,’ says Peter Dixon, NIESR senior economist.
‘Nevertheless, the MPC cannot risk appearing complacent, and we therefore expect one precautionary 25 basis point rate increase over the coming months.’
What does it mean for your savings?
Rising inflation will quickly erode the real value of people’s savings.
Tim Grisditch, managing director at Unbiased says: ‘With an estimated £2 trillion currently sitting in cash and low-interest savings accounts across the UK, this uptick is a significant concern.
‘As inflation rises, the real-world value of these savings diminishes more rapidly, meaning money in the bank effectively buys less than it could before.
‘To protect your long-term wealth, it is more important than ever that your money is proactively managed and well-invested. Relying on standard accounts in this economic market often means losing value in real terms, making it an uneasy time for those trying to build a financial safety net.’
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What does it mean for your mortgage?
Markets will be repricing their interest rate expectations for the year, with some expecting a rate hike later this year. However, the Bank of England is expected to leave the base rate unchanged at its 30 April meeting.
Samuel Fuller, director of Financial Markets Online says: ‘The Bank of England now looks set to leave its Base Rate unchanged when its ratesetting committee meets next week, and swap rates, which reflect interest rate expectations and determine the price of fixed rate mortgages, have come down noticeably from their March peak.
‘Several mortgage lenders are already trimming their interest rates in response and the Pound looks set to soften.
‘Yet it’s premature to dismiss the UK’s inflationary threat. This March data only captures the inflationary impact of the first month’s fighting, and April’s data may prove much worse.’
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