Inflation rose by 2.8% in the 12 months to February 2025, representing a slight dip from January's 3% figure, according to the latest Consumer Price Index (CPI) figures released by the ONS.
The inflation figure is slightly lower than expected, as experts had predicted a 2.9% inflation rate. That said, it's still higher than the Bank of England's target of 2%.
The slight fall in inflation was met with a lacklustre reaction by experts, particularly because of the expected rise in various household bills from April onwards.
Danni Hewson, AJ Bell head of financial analysis, said: "This dip in inflation was slightly deeper than had been expected by economists, but it’s hard to get excited about one month’s data when we’re all hyper aware that things are about to get more difficult once again.
"In many cases, wage increases will help offset the price hikes hurtling our way, as will the uprating in pensions and benefits, though in most cases, those extra pennies have probably already been spent."
Some businesses are also concerned about the increases to NICs and the minimum wage from next month, which will create additional pressures and could lead to price increases across the board.
David Bharier, Head of Research at the British Chambers of Commerce, said: “Today’s data showing the CPI rate slowed to 2.8% in February is good news, but it’s too early to be certain on the direction of travel. Volatility will be a key feature for the next few months. SMEs are battling shocks from both home and abroad in the form of domestic tax increases and a looming global tariff war.
“Many firms tell us they will have to raise prices and rethink recruitment when NICs and NLW increases kick in next month. Investment is also likely to suffer until greater certainty emerges."
Despite the slight dip, the UK's CPI inflation figure was higher than that of France, which recorded inflation of 0.9% as well as Germany, which came in at 2.6% over the same period. It was also higher than the EU average of 2.7%.
Why has the inflation rate fallen?
Inflation came in lower than expected, with the largest downward contributor to the trend being clothing. Prices in clothing and footwear fell by 0.6% in the 12 months to February 2025. This was also the first negative annual inflation rate for the category since October 2021. The main reason for the fall was women's clothing with a small downward effect attributed to children's clothing as well as clothing accessories. Recreation and culture as well as housing and household services also contributed to the downward trend in inflation.
What will the fall in inflation mean for interest rates?
The Monetary Policy Committee looks at several factors when deciding whether to cut the base rate. On the domestic front, these include inflation, economic growth and employment levels, among other geopolitical factors further afield.
Over the last few months, the Monetary Policy Committee has stressed that decisions for future interest cuts will be based on a gradual and careful approach. It's unlikely that the slightly lower-than-expected fall in inflation will change the MPC's stance on this.
In February 2025, the Monetary Policy Committee voted to cut the Bank of England base rate to 4.50% down from 4.75%. All nine members of the committee voted to cut the interest rate, with seven voting to reduce it by 0.25% and two voting to reduce it by 0.5%. In its minutes, the committee cited the "substantial progress on disinflation" over the last two years as part of the reasoning for the measure.
During the March meeting, however, the committee voted by a majority of eight to one to keep the base rate at 4.50%, with only one member voting to reduce it by 0.25%. In its decision, the MPC emphasised its commitment to a gradual and careful approach to future base rate cuts. Part of the reason for holding the base rate was the fact that inflation was higher than expected in January.
The next Monetary Policy Committee meeting to decide on future base rate cuts is scheduled for May 8, 2025. Given the slight fall in inflation and the fact that rates are currently predicted to fall to 4.25% by June 2025, it's possible we will see another base rate cut during the May meeting. We discuss this in more detail in our article on whether interest rates will continue to fall in 2025.
How will the fall in inflation impact mortgages and savings?
An unexpected fall in inflation is typically good news for borrowers and not so great news for savers. A sustained fall in inflation could be a predictor for future base rate cuts which can see mortgage rates and savings rates fall. Borrowers, particularly those with a low loan-to-value ratio, could currently benefit from fixed-rate mortgage deals under 4%. If you're in the market for a mortgage currently, you may wish to take a look at the best mortgage rates in the UK.
Savers happy to lock up their funds in fixed bonds may wish to look at products now as rates across the board are steadily falling in light of expected interest rate cuts. The best fixed-rate bonds now offer up to 4.65% AER for a one-year fixed-term savings account, while some bonds offer up to 4.55% AER. We discuss this in more detail in our article on the best savings accounts in the UK.
There are still several savings products offering more than 5% for those happy with a variable interest rate. The best regular savings accounts offer up to 7.5%, while some Cash ISAs offer temporary boosted rates up to 5.26% - though many interest rate boosts only last a few months. If you're looking for the best savings rates on the market, check out our article on how to get more than 5% interest on your savings.
What to do if you're struggling with your bills
Despite the slight fall in inflation, many households are feeling the pressure on their finances, particularly with the expected rise in household bills in April. There are resources available to help if you're struggling with your bills. Your first point of contact will typically be your utility supplier, council, or mortgage lender, depending on the bills you're struggling with. They'll often be able to work with you to come up with ways to ensure you're paying your bills in a way that works for you. You can also check that you're claiming all the benefits you're entitled to through the website entitledto.
In addition, if you're looking to lower your bills in general, take a look at our how to save money on your household bills article. We also have articles that may be more specific to your situation, such as:
- How to save money on your energy bills
- How to save money on your water bills
- How to save money on your mortgage
- How to save money on your council tax
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