UK inflation fell back to 3.4 per cent – the lowest level in more than two and a half years – boosting hopes that the Bank of England could look to cut interest rates in the summer.
The larger-than-forecast decline is a significant boon for Rishi Sunak, who made reducing inflation one of his key economic pledges. Getting inflation down to 2 per cent is also a key target for the BoE.
The figures released by the Office for National Statistics (ONS) on Wednesday morning showed that inflation was 3.4 per cent in February, which is slightly lower than the 3.5 per cent predicted by economists.
This is the lowest level inflation has been at since September 2021. Despite inflation falling it does not mean that prices are falling, only that they are rising less fast.
The latest figures are moving gradually closer to the Bank of England’s 2 per cent inflation target and comes ahead of the interest rate decision on Thursday.
Financial markets overwhelmingly think that policymakers will keep interest rates on hold at 5.25 per cent, but the fall in inflation today increases the chances of them being cut in the summer.
Chancellor Jeremy Hunt did little to dismiss this idea when reacting to the latest inflation figures and said it could pave the way for the BoE to cut interest rates.
He said: “Families today will heave a sigh of relief that we are firmly on track to bring inflation down to its target of 2 per cent. This is the lowest headline rate for two-and-a-half years.
The latest figures are moving gradually closer to the Bank of England’s 2 per cent inflation target and comes ahead of the interest rate decision on Thursday
(PA Wire)
“But most encouragingly food inflation, which was nearly 20 per cent a year ago, is now just 5 per cent.
“And what this shows is that the plan to bring inflation down – it was over 11 per cent when Rishi Sunak became Prime Minister, now just 3.4 per cent – that plan is working but we do need to stick to it and see it right the way through.”
The ONS figures also showed that food price inflation fell back to 5 per cent in February, down from 7 per cent the previous month. On a monthly basis, food inflation lifted by 0.2 per cent – far lower than the steep rises seen a year earlier.
Prices in restaurants and cafes also eased back, with the annual rate of inflation falling to 6.7 per cent last month from 8.2 per cent in January.
Grant Fitzner, chief economist at the ONS, said: “Inflation eased in February to its lowest rate for nearly two-and-a-half years.
Inflation rate changes dating
(ONS)
“Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and cafe price rises also slowed.
“These falls were only partially offset by price rises at the pump and a further increase in rental costs.”
The ONS added that it was not seeing any sign yet of an impact on consumer prices from the Red Sea disruption, following attacks from Houthi rebels on cargo ships going through the trade route in recent months.
Paula Bejarano Carbo, economist at the National Institute for Economic Research, said: “Annual CPI inflation was 3.4 per cent in February, falling from 4.0 per cent in January, driven by downward contributions from food and alcoholic beverages.
“This figure represents the lowest annual CPI inflation figure since September 2021 and possibly signals that the MPC can start to cut interest rates in the coming months – though we don’t expect any change at tomorrow’s meeting.”
Paul Dales, chief UK economist at Capital Economics, said: The second bigger-than-expected fall in CPI inflation in as many months, from 4 per cent in January to 3.4 per cent in February (BoE 3.5 per cent, consensus 3.5 per cent, CE 3.4 per cent), probably won’t make the BoE sound any more dovish when it leaves interest rates at 5.25 per cent tomorrow.
“But our view that inflation will fall below 2 per cent in April and then ease towards 1 per cent suggests the BoE may have to start cutting rates in the summer and reduce them to 3 per cent next year.”
