UK inflation has fallen from 4% in January to 3.4% in February, its lowest level in more than two years.

This decline in inflation, which was more than the forecast fall of 3.5%, has been driven largely by a slowdown in food, restaurant and café prices.

Food inflation declined significantly from 7% in January to 5% in February, marking a big fall from around 19% in March 2023.

Inflation is expected to fall under the 2% target by the Bank of England (BoE) within the next few months.

While the BoE is expected to hold the base rate at 5.25% on 21 March, the latest inflation data increases the chances of a base rate cut in the summer.

“Money markets are once again pricing in four or even the off chance of five cuts by the end of the year, where yesterday just three seemed possible,” comments Danni Hewson, head of financial analysis at AJ Bell.

“The anticipated impact of a falling energy price cap will have already stoked expectation that the Bank of England’s 2% target is within reaching distance.”

What lower inflation means for your money  

The drop in inflation means prices are rising more slowly, which is welcome news to many.

Also, as inflation has fallen to 3.4% and top savings rates are around 5%, it’s now easier to beat inflation.

However, the more likely base rate cuts become, the more likely savings rates will fall – so it’s worth shopping around for the best deal now, particularly if you want to use a fixed-rate account.

The impact on homeowners is more mixed. While mortgage rates initially fell at the end of 2023, they have recently risen, and deals are more likely to be pulled at short notice.

While the latest inflation data is unlikely to convince the BoE to cut the base rate in March, it may be enough to stop further mortgage rate rises or even result in rates easing slightly.

If you’re retired or hoping to retire soon and are considering an annuity, it’s worth considering the impact a future base rate may have on rates.

Between March 2022 and March 2024, annuity rates soared 34%, driven by base rate rises. So, any future cuts could impact your rate and the fixed income you receive.

Whether you’re planning for retirement, buying a home, remortgaging, or investing it’s a good idea to get financial advice.

Unbiased can quickly connect you with a qualified financial adviser who can help you get the most out of your money.