Inflation surprisingly continues to fall but expect a rebound next month

Inflation fell more than expected and for the second month in a row, official figures show.

The consumer price index (CPI) measure of inflation fell to 2.6% in March, down from 2.8% in February and 3% in January, according to Office for National Statistics (ONS) data. It means prices are rising at the slowest pace since December and closest to the Bank of England's 2% target.

The rate is also lower than expected by economists polled by Reuters, who anticipated inflation of 2.7%. But the drop is likely to be short-lived as a raft of bill rises kicked in at the start of April.

Energy, water, and council tax bills rose throughout the UK at the start of this month. Why did inflation fall? It was a fall in fuel costs, thanks to lower oil prices that led to the surprise drop, combined with the unchanged food price rise.

The price of games, toys and hobbies as well as data processing equipment, all fell. These drops counteracted a "strong" rise in the price of clothes, the ONS said.

The late timing of Easter also meant comparing March this year - as the ONS does by compiling an annual figure - with last isn't comparing like with like. Read more:Sue the government, Sir Alan Bates tells fellow Post Office victims'Likely' British Steel will be nationalised, says business secretary Easter and the associated school break brings around things like higher airfares and hotel costs, something that wasn't seen last month as the feast takes places in April.

What does this mean for interest rates? All measures of inflation fell, in a boost to the Bank of England as they mull interest rate cuts. A key way of assessing price rises, core inflation, which excludes volatile price items like fuel and food, dropped to 3.4%.

It's closely watched by the rate setters at the Bank of England, who meet next month and are widely expected to make borrowing less expensive by bringing interest rates down to 4.25%. Another important measure - services inflation - dropped to 4.7% from 5% in February.

As a predominantly services-based economy, a drop in that rate is good news for central bankers and households. Inflation data, combined with the fact job vacancies are at pre-pandemic levels for the first time since 2021, has meant traders are now expecting four interest rate cuts this year, which would bring the base interest rate to 3.5% by December..