UK inflation undershoots expectations in February
Inflation hit 2.8 per cent in the year to February, pointing to a fragile UK economy as Chancellor Rachel Reeves prepares to deliver her Spring Statement this afternoon.
The Bank of England last week held interest rates at 4.5 per cent as inflation has remained high amid escalating trade tensions and incoming tax rises.
Now the Office for National Statistics (ONS) has revealed that the annual rate of price growth was lower than the rate of three per cent seen in January.
Most analysts slightly overestimated inflation for the month, saying that Consumer Prices Index (CPI) inflation would come in at 2.9 per cent in February.
“Inflation eased in February. Clothing prices, particularly for women’s clothes, was the biggest driver for this month’s fall,” Grant Fitzner, chief economist at the ONS, said.
“This was only partially offset by small increases, for example, from alcoholic drinks.”
Darren Jones, chief secretary to the Treasury, said the government was “protecting working people’s payslips from higher taxes”.
“In a changing world, we’re focused on delivering economic stability to secure people’s finances – freezing fuel duty, protecting the Triple Lock and increasing the national living wage by £1,400 a year for full-time workers, while going further and faster to drive growth through our Plan for Change,” he said.
Rising transport and communication costs drive prices higher
Higher costs in transport and communication sectors meant inflation remained above the Bank’s targets.
Core inflation, which does not account for food and energy, came in at 3.5 per cent in the year to February, while the annual inflation rate for CPI services remained at five per cent.
The latest data by the ONS is nevertheless unlikely to calm members on the Monetary Policy Committee (MPC) at the Bank of England who are fearful about increasing price pressures brought by tax rises and a possible tariffs.
The research company Pantheon Macroeconomics forecasts that inflation could spike next month and reach 3.5 per cent.
Analysts at Capital Economics claimed the slight dip in inflation was a “bit of a red herring” as it also expected inflation to rise to above three per cent in next month’s readings.
“That and the risk of spillovers into wages will probably mean the Bank of England will press pause on interest rate cuts at some point in the coming months,” said Paul Dales, chief UK economist at the consultancy Capital Economics.
“If that were to prompt a further rise in market rate expectations, today may not be the only time this year the Chancellor has to tighten fiscal policy to compensate for higher borrowing costs.”
In March, the Bank of England maintained its prediction that inflation would hit a peak of 3.75 per cent this year.
Higher energy prices and a further increase in food costs are widely expected to push inflation up in the coming months.
The OBR will release its forecasts for price growth after Reeves delivers her Spring Statement in Parliament later today.
The fiscal watchdog said in October that inflation would peak at 2.7 per cent this year.
Inflation hit a high of 11.1 per cent in October 2022 and has steadily fallen.
However, with inflation figures still higher than the Bank’s two per cent target, the Monetary Policy Committee (MPC) is unlikely to move quickly to lower interest rates.
Trump’s tariffs on aluminium and steel, which will take effect on April 2, are expected to rattle businesses and force firms to raise prices.
The ONS has separately come under scrutiny over its data and information handling.
The statistics body has had to postpone releases and revise its own figures.
Internal emails also showed that the sample size for one estimate “collapsed to only five individuals”, a report by the Financial Times said.
It recently revised the list of items in the basket of goods, which is used to measure inflation, as it included VR headsets and sliders and kicked off DVDs and minced turkey.