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Inflation expected to cool to two-and-a-half-year low

UK inflation has been predicted to fall to its lowest level since September 2021 when fresh economic data is released.

The Office for National Statistics is expected to reveal on Wednesday that Consumer Prices Index (CPI) inflation was around 3.1% in March, according to a consensus of economists.

It comes after a reading of 3.4% in February and will mark the lowest for two and a half years, when it was also 3.1%.

Economists at Pantheon Macroeconomics predicted the reading could fall even further, with an estimate of 3%.

However, they stressed that services inflation – which has been a focus for Bank of England policymakers considering potential interest rate cuts – is likely to remain at elevated levels.

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Pantheon says it expects services inflation of 5.9% for the month, nudging down slightly from 6.1% a month earlier.

Robert Wood, chief UK economist at the research company, said food and goods prices are expected to drop over the month, contributing to the slower rate of inflation.

He said he expects slower services inflation to “shave another 0.1 percentage points off the headline inflation rate, despite a boost from the early Easter, as last year’s huge price rises continue to drop out of the annual comparison”.

Mr Wood and Oxford Economics’ Edward Allenby both said the cool-down in inflation means the Bank of England is likely to start cutting interest rates from 5.25% in June.

Mr Allenby said inflation is expected to hit the Bank’s target rate of 2% later this year, although the benefit of falling energy prices could prove temporary and cause inflation to tip higher again.

“Further declines in wholesale gas prices mean the energy component should continue to drag heavily on headline inflation throughout 2024,” he said.

“Meanwhile, the food and core categories will benefit from strong base effects and the indirect effects of lower energy costs.

“Therefore, our latest forecast shows inflation dropping well below 2% in the second half of 2024.”