In the year leading up to March, prices in the UK increased by 2.6%, which is lower than the prior month’s rise yet remains higher than what the Bank of England aims for.
The Bank of England adjusts interest rates to aim for a 2% inflation target, and in 2025, it reduced them twice, bringing the rate down to 4.25%.
Previously, the Bank had cautioned that they anticipated inflation would climb once more in 2025.
What is inflation?
Inflation refers to the rise in the cost of goods and services over a period of time.
If a milk bottle priced at £1 increases to £1.05 after one year, the yearly milk inflation would be 5%.
What method is used to measure the inflation rate in the UK?
The Office for National Statistics (ONS) monitors the costs of numerous daily necessities such as food and fuel.
This digital “assortment of items” is frequently revised to mirror purchasing patterns, with
VR headsets and yoga mats were introduced in 2025.
, with local newspaper advertisements taken out.
The ONS tracks price variations over the past year to determine inflation rates.
The primary inflation indicator is known as
the Consumers Price Index (CPI)
, with the most recent statistic being released monthly.
CPI was
2.6% for the year ending March 2025
, decreasing to 2.8% for the 12-month period ending in February.
The decline was more significant than what financial experts anticipated, according to the ONS, primarily due to decreased costs for apparel and footwear.
The bank also takes into account other metrics like “core inflation” when determining whether and how to adjust interest rates.
The core Consumer Price Index excludes food and energy prices since these categories often exhibit significant fluctuations; thus, it may provide a clearer picture of sustained long-term patterns.
It stood at 3.4% in March, which is marginally lower than the 3.5% recorded in February.
What factors are causing prices to continue increasing?
Inflation has dropped considerably after reaching 11.1% in October 2022, marking the peak level over the past four decades.
That said, this does not indicate a decrease in prices; rather, it suggests that price increases are slowing down.
Inflation soared in 2022 because oil and gas were in greater demand after the Covid pandemic, and energy prices surged again when Russia invaded Ukraine.
It stayed significantly above the 2% target largely due to increased costs of food.
How does increasing interest rates assist in reducing inflation?
As inflation remained significantly higher than its 2% objective, the Bank of England raised interest rates to 5.25%, which marked a 16-year peak.
The concept revolves around making lending pricier so individuals end up with reduced funds for spending. Additionally, this could motivate people to increase their savings instead.
Consequently, this leads to decreased demand for products and moderates inflation.
But it is a balancing act – increasing borrowing costs risks harming the economy.
For instance, homeowners may encounter increased mortgage payments, potentially offsetting more favorable saving offers.
Companies tend to take out fewer loans as well, reducing their likelihood of generating new employment opportunities. Others might lay off workers and decrease investments.
What’s occurring with the interest rates in the UK, and is another decrease likely?
The Bank of England reduced interest rates in August and November 2024, followed by further cuts in February and May 2025.
taking rates to 4.25%
.
Andrew Bailey, the Governor of the Bank of England, stated that the choice made in May stemmed from the decline in inflation. He also suggested that additional “measured and cautious” reductions might take place subsequently.
However he warned that
the implementation of American trade duties
has demonstrated “the unpredictability of the global economy.” The Bank stated it anticipated that the tariffs would hinder the UK economy and result in lower inflation than projected.
Earlier, the Bank had stated that it anticipated inflation to rise to 3.7% from July through September 2025, after which it would decrease again toward the end of 2027.
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Is pay staying abreast of price increases?
The
latest official figures
demonstrate that routine wages in Great Britain
increased by more than the rate of inflation from December to February
.
The average yearly increase in compensation (minus bonuses) for the three-month period came out to be 5.9%.
Once inflation is factored in, wages increased by 3% from December to February.
Earnings in the private sector rose more than compensation in the public sector.
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What’s occurring with inflation and interest rates in Europe and the United States?
Both the United States and European Union nations have been attempting to curb rising prices.
In April 2025, the inflation rate for Eurozone countries stood at 2.2%, unchanged from March but marginally lower than the 2.3% recorded in February.
In June 2024, the European Central Bank (ECB) reduced its key interest rate from a record-high of 4% down to 3.75%, marking the first decrease in half a decade.
It has subsequently reduced rates an additional five times, bringing its benchmark rate down to 2.5%.
The inflation rate in the United States dropped to 2.4% in March, decreasing from 2.8% the prior month yet remaining higher than the Federal Reserve’s targeted 2%.
Following several reductions in late 2024, the U.S. central bank decided to keep interest rates steady during its May meeting, pointing to the uncertainties caused by
the US tariffs
.
This keeps its main interest rate steady between 4.25% and 4.5%.
The Federal Reserve has
frequently face attacks initiated by President Trump
, who would like to see additional reductions.
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