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UK inflation falls to 3.2% – what's next for interest rates, savings and annuities

UK inflation fell to 3.2% in the 12 months to March. Here's what’s next for inflation and interest rates, and what it means for markets, the economy, savings and annuities
View of the Bank of England and London financial district.jpg

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Inflation in the UK has taken another welcome step towards target, as the brakes have been put on price increases. The UK Consumer Prices Index (CPI) fell to 3.2% in the 12 months to March 2024, down from 3.4% in February.

While it’s slowly heading towards the Bank of England’s (BoE) 2% target, interest rate cuts are still set to stay elusively in the distance.

While slightly less than forecast, the drop was widely expected, with the largest upward effect coming from higher fuel prices, even though food cost hikes continued to slow.

Consumer Prices Index (CPI) definition

The consumer price index (CPI) is a measure of inflation. CPI measures how much the price of a basket of goods (such as food and beverages) and services (such as bus fares and gym memberships) has risen over time.

Although consumer prices are heading in the right direction, it’s not just the headline rate which determines BoE action.

Policymakers scan other data, and the snapshot of stubborn wage growth out this week continues to be a concern for keeping a cap on inflation.

Unemployment might have risen, but the labour market figures are considered unreliable. More people out of work isn’t yet translating into a sharp slowdown in wage increases, as there’s still a fight for talent in big pockets of the economy.

Core inflation, which strips out volatile food and fuel prices is also cooling, slowing to 4.2%. But the worry is employers could pass on higher wage bills in the form of higher prices in the months to come.

It means interest rates might stay at a painful level for even longer than earlier forecasts, with August or September being increasingly pencilled in.

Other central banks, particularly the Federal Reserve (Fed) in the United States are taking a cautious stance, staying committed to the fight against inflation.

Fed Chair Jerome Powell has warned that interest rates might have to linger for longer, with confidence ebbing away the price spiral is being brought under control.

It looks like the Fed’s prior plan to bring in three rate cuts this year is already being recalculated.

This has led to fresh uncertainty on Wall Street and prompted sell-offs as inflation worries combine with geo-political concerns. There are some expectations the US central bank could still lower the Fed funds rate and help ease borrowing costs in September. However, there’s also a chance that rate cuts might not now happen this year at all.

The European Central Bank (ECB) looks likely to join the Swiss National Bank in the rate cut party, but it’s set to be a much quieter affair. The BoE and the Fed are now expected to be latecomers.

ECB President Christine Lagarde has indicated that the central bank is on course to cut in the near term, barring any major shocks, with expectations centring around June.

But she and other central bankers will be monitoring developments in the Middle East closely. While recent oil price rises will have only a minor impact on headline inflation rates, a big spike could lead to a fresh rethink in policy.

This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice.

What's next for savers?

The news will likely put smiles on savers’ faces.

With inflation at 3.2%, there are savings and Cash ISA rates which beat inflation in every market – from easy-access to the longest fixed-rate savings deals. There are still shorter-term fixed rates offering more than 5% – so they can beat it by a decent margin.

Easy-access rates have been particularly strong in 2024. Meanwhile, one-year fixed rates stayed relatively steady in March, and we’ve actually seen longer term fixed rates rising.

These deals aren’t going to last forever. As inflation comes under control, banks will price in more rate cuts, and savings deals will drop.

Over the past quarter, we’ve already seen savings rates fall across the board, with the largest declines occurring in the fixed-term deposit space.

So, it could be worth getting hold of a competitive deal while you can – and checking online banks and savings platforms, where you’ll usually find the best rates. Remember fixed term savings can’t be accessed until maturity.

Is now the time to buy an annuity?

Inflation is now at its lowest level in two and a half years, bringing some welcome relief to pensioners who’ve struggled to make ends meet.

The 8.5% boost to the State Pension that came through this month could bring some headroom to people’s budgets and help them plan ahead.

Retirees in the market for an annuity will find their decision finely balanced.

Data from our annuity search engine shows a 65-year-old with £100,000 can currently get around £7,000 a year from a level annuity.

However, with the eye-wateringly high inflation we saw in recent years still looming large, many will be considering whether an inflation-linked annuity is the way to go.

The starting incomes from these are much lower though – an RPI-linked annuity currently pays out £4,406, which could prove tricky for budgeting.

Do you go for the higher amount now and risk its purchasing power being eaten away by a period of high inflation. Or do you take the lower income with the promise of it increasing, but the risk it might take more than a decade to get the difference back?

Remember, you can’t usually take money out of a pension until at least age 55 (rising to 57 from 2028). It’s important to consider your options carefully as annuities can’t normally be changed once set up. If you're not sure what to do with your pension, you should seek guidance from Pension Wise, the government’s free impartial service to help you understand your retirement options.

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Written by
Susannah Streeter
Susannah Streeter
Head of Money and Markets

Susannah is a key contributor to our content. She follows changes in monetary policy movements and fiscal policies closely to assess the impact on financial markets and economic growth, and has extensive experience in covering technology stocks and the retail sector.

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Article history
Published: 18th April 2024