UK inflation has fallen from 2.3% in April to 2% in May, its lowest level in almost three years.

The rate of inflation, which is in line with experts’ forecast of between 1.9% and 2.1%, has been driven largely by a slowdown in the price rises for food and soft drinks, recreation and culture, and furniture and household goods.

The fall in inflation is good news. As inflation is now at the 2% target the Bank of England (BoE) aims for, the chance of a base rate cut in August is increased. However, some economists believe we may have to wait until September to see a cut.

Many factors have contributed to delayed base rate reductions, including strong wage growth in the UK, high inflation and possibly even the upcoming General Election.

“Inflation hitting target means many will be expecting a cut to interest rates at the Bank’s meeting tomorrow. However, it would be very unlikely for the ratesetters to cut interest rates during an election campaign. The future path for inflation – and so rates – will be impacted by whoever becomes prime minister and how their fiscal policy shapes up,” says Laura Suter, director of personal finance at AJ Bell.

What lower inflation means for savers

The drop in inflation means prices are rising more slowly rather than falling. While this isn’t exactly what consumers seek, it’s still welcome news.

As inflation is now 2% and top savings rates are 5.5%, savers can still easily beat it if they opt into a savings account with a fixed rate. This means their money doesn’t lose value in real terms.

However, the more likely base rate cuts become, the more likely savings rates will fall.

With the likelihood of a base rate cut by the end of the summer, it’s worth shopping around for a fixed-rate deal now if you want to take full advantage of generous rates.

What lower inflation means for homeowners

Homeowners have had a tough time this year as mortgage rates have been volatile, rising and falling without much warning.

While mortgage rates initially fell at the end of 2023, they recently rose again after US inflation increased more than anticipated, pushing back BoE base rate cut expectations.

However, the latest US data is more promising, as inflation fell to 3.3% in May.

There’s a chance that mortgage rates will improve now, as many expect the base rate to be cut in August.

What lower inflation means for annuities

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

Over two years, annuity rates soared 23%, 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.