UK inflation dropped to 3.4% in Feburary, the lowest in two and a quarter years. This was due in part to a slower pace of price increases in food and restaurants.
The larger-than-forecast drop in the consumer price index (CPI), from January, will give a boost Rishi Sunak who has promised to reduce inflation. It will also add to the speculation that the Bank of England is going to cut interest rates this summer.
The Labour Party and the trade unions have said that many families are still facing a crisis due to the rising cost of living after a 25% increase in food prices since January 2022, and the doubling of gas since the Russian invasion.
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, based on the steep decline 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.
Food inflation fell from 19.1% to 7% in March of last year.
The inflation rate for restaurants and hotels dropped from 7% down to 6%. The price of second-hand cars also fell by 7.3% in the past year, compared to a 5.9% decline in January.
The core inflation rate, which excludes volatile items like food and oil prices, has fallen 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 hint that would justify interest rate reductions.”
The rise in wages across the hotel and restaurant industry has pushed up prices. This is expected to continue when the minimum wage increases by almost 10% next April. In the financial and business services sectors, where there are skills shortages, wages have risen faster than inflation.
The US inflation rate increased from 3.1% to 3.2% from January, while the eurozone’s 20 members saw their consumer prices drop to 2.6% from 2.8% from January.
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 reducing national insurance, but we must be able to do this without increasing borrowing or cutting funds for 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 payments were increasing.
In last February the annual inflation rate was 10.1%. This is down from a high of 11.1% in October 2020.
Paul Nowak said that the fall in inflation will provide little relief to families who are already struggling. He said that prices were still rising, but a little slower.