Inflation fell unexpectedly to 2.6% in the twelve months to March 2025, according to the latest Consumer Price Index (CPI) figures released by the ONS. It came in lower than the original 2.7% rate predicted by experts. It was also lower than February's inflation rate of 2.8%.
This was the second consecutive month where inflation came in lower than expected. That said, the inflation rate is still higher than the Bank of England's 2% target.
The slight fall in inflation was met with a lukewarm reaction from most experts, with Myron Jobson, Senior Personal Finance Analyst at interactive investor, describing it as "the calm before the storm". He said: “The cooling of inflation in March is a welcome development, but it could be the calm before the storm, as increases in utility bills, the rise in national insurance contributions paid by employers, and the impact of President Donald Trump’s tariff wars start to filter through from April.
“This triple threat of headwinds could mean that the road back to the Bank of England’s 2% inflation target is longer and includes further twists and turns."
Trump's tariff war, in particular, is causing uncertainty with experts unsure whether it'll drive inflation up or down. James Smith, Research Director at the Resolution Foundation, said: “Although inflation will rise sharply in April, reflecting an increase in the Ofgem price cap, the truth is that the outlook for UK inflation hinges on President Trump’s tariff policies.
“Global trade uncertainty could drive down our prices, with oil already down more than 10 per cent since the start of April – but a global trade war would create renewed inflation, increasing pressure on British families already struggling with the cost of living.”
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 2.3% over the same period.
Why did inflation fall in March?
Inflation came in lower than expected, with the largest downward contributor to the trend being fuel prices as well as the recreation and culture sectors.
The average price of petrol fell by 1.6 pence per litre between February and March 2025, and it currently stands at 137.5p per litre. This is also lower than the average price of petrol in March 2024, which was 144.8 per litre. Diesel prices also fell by 1.6 pence per litre, and diesel now costs 144.8 pence per litre down from 154.1 pence per litre in March 2024.
Other contributing factors included a fall in prices within the recreation and culture sector, with the largest drop coming from games, toys, and hobbies as well as data processing equipment.
Despite the lower-than-expected inflation figure, experts believe inflation will likely remain above the Bank of England's 2% target for the remainder of 2025. The Office for Budget Responsibility (OBR) expects inflation to rise to 3.7% by the third quarter of 2025 before slowly falling to 2% by the last quarter of 2027.
What will the fall in inflation mean for the base rate?
Inflation is one of the factors that the Monetary Policy Committee (MPC) considers when it decides whether to cut the base rate. Other factors include economic growth and employment levels as well as other geopolitical factors. We have already seen one interest rate cut this year, with the MPC voting the cut the base rate to 4.50% down from 4.75% back in February 2025. During the March meeting, however, the committee voted to keep the base rate at 4.50%, emphasising its commitment to a gradual and careful approach to future base rate cuts.
The next MPC meeting is scheduled to take place on May 8, 2025. This second consecutive fall in inflation is a good indicator that rates might be cut, especially as experts remain cautiously optimistic despite the current uncertainty around rising prices in April.
Danni Hewson, AJ Bell's head of financial analysis, said: "At 2.6% inflation is ahead of the Bank’s 2% target but it’s likely to be sufficiently low to give rate setters the green light to keep cutting the base rate, with markets currently pricing in an 85% chance of a quarter percentage point cut at the next meeting.
“The bigger question is where do rates go next? We know increased household costs will colour next month’s data, but Donald Trump’s tariff policy could potentially result in a dumping of lower priced goods on UK shores. Concerns about global growth may keep the oil price subdued, though homegrown issues like increased labour costs could result in a significant fall in employment and lower wage growth."
Myron Jobson, Senior Personal Finance Analyst at interactive investor echoed Hewson's remarks, adding: "The big question for the Bank of England is how to balance the risk of inflation rising again with the need to stimulate greater economic growth - and what that means for interest rates. A rate cut in May seems increasingly nailed on, and the market has priced in further cuts amid concerns of an economic slowdown triggered by tariffs."
Rates are currently predicted to fall to 4.25% by June 2025 which would support another base rate cut in May. 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?
Inflation fell unexpectedly for the second month in a row which is good news for borrowers. A fall in inflation can result in future base rate cuts, which in turn can result in mortgage rates falling. Borrowers with a loan-to-value ratio of 60% could currently get fixed-rate mortgage deals under 4%. If you're looking for a mortgage, take a look at our article, which rounds up the best mortgage rates in the UK.
If the fall in inflation results in a base rate cut, savings products could be affected too. Savings accounts across the board have been offering lower and lower interest rates, with many pulling their best deals in the new financial year. Savers looking to lock up their funds in fixed bonds may want to look at products now before rates fall any further. The best fixed-rate bonds now offer up to 4.65% AER for a one-year fixed-term savings account. Take a look at our article rounding up the best fixed rate bonds in the UK if you're looking to compare fixed-rate savings accounts.
There are also several savings accounts offering more than 5% for those looking for more flexible options with a variable interest rate. The best regular savings accounts offer up to 7.5% currently. Choices have been dwindling in recent months, however, with more and more providers slashing their rates. If you're looking for the best savings rates on the market, take a look at our article on how to get more than 5% interest on your savings.
What to do if you're struggling with your bills
The slight fall in inflation in March may sound like good news, but the fact remains that the increase in bills in April will likely put pressure on households across the board. That said, there are resources available to help if you're struggling with your bills. We outline some of the help available in our roundup of the six household bills going up in April 2025.
If you're struggling with paying specific bills, you should contact the relevant utility supplier, council, or mortgage lender to explain the situation. They often have policies in place to help if you're struggling and can help you come up with ways to pay your bills in a sustainable manner that works for you. You can also check that you're claiming all the benefits you're entitled to through the website entitledto.
There are also several resources available via the website. If you're concerned about household 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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