The UK’s inflation rate fell to just 3.4% in the month of February, the lowest it has been for over two years. This is because the pace of annual price increases began to slow down again after having stagnated the previous months.
The larger-than-expected decline in consumer prices (CPI) , from 4% in Jan, will give a big boost to Rishi, who pledged to lower inflation. It will also add to the speculation that the Bank of England is going to cut interest rates this summer.
Most economists predicted that the headline figure for February from the Office for National Statistics would fall to 3.5%, the lowest level since September 2021 when it was only 3.1%. The rate of inflation is not falling. It’s just rising slower.
Investors bet that inflation will continue to fall through the spring, reflecting a sharp drop in natural gas prices since last year as well as a slower rise in food prices.
The Bank of England maintains a 2% inflation target. It is also forecasting that the CPI will drop below 2% by April, and stay there throughout the summer. The central bank policymakers will likely leave the base rate unchanged , at 5.25% , when they meet Thursday.
Paul Dales, the chief UK economist at the consultancy Capital Economics, predicted inflation would drop towards 1% after April and this steeper-than-expected fall would push the Bank to cut rates in the summer.
Dales stated that the BoE could have to begin cutting rates this summer, and eventually reduce them to 3% by next year.
The February CPI fell across all categories. Food inflation dropped from 7% down to 5%, and restaurant and hotel prices from 7% down to 6%. Core inflation, which excludes volatile items like food and oil prices, fell from 5.1% down to 4.5%.
The central bank closely monitors the services inflation to look for signs of a slowdown in domestic inflation. It fell by 0.1 points less than expected, from 6.5% down to 6.1%.
Dales said that “accordingly, the inflation rate is not more persistent than what the BoE had expected. It is also moving along the same path as the BoE’s hinting would justify interest rate reductions.”
The chancellor Jeremy Hunt said that inflation has fallen “decisively”, a sign of the success of government economic plans.
He said: “This will set the stage for improved economic conditions that could allow us to make progress in our ambitions to boost growth and make the work we do pay. We are working towards eliminating the double tax of work by bringing down the national insurance, but we must be able to do this without increasing borrowings or cutting funding for the public services.”
Rachel Reeves was Hunt’s Labour counterpart and she dismissed his claim. The shadow chancellor claimed that prices were high, while “the tax burden was the highest in 70 years and mortgage payment are increasing”.
In the month of February, annual inflation was 10.1%. This is down from 11,1% in October, 2022.
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