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UK inflation unexpectedly fell to 2.8 per cent in February, in a lift to chancellor Rachel Reeves as she prepares to ship a high-stakes Spring Assertion.
The annual improve in client costs, reported by the Workplace for Nationwide Statistics on Wednesday, was under the two.9 per cent forecast by economists polled by Reuters and the 10-month excessive of three per cent recorded in January.
The decline was pushed by a fall in clothes costs, which dropped 0.6 per cent within the 12 months to February, marking the primary contraction since October 2021.
Nonetheless, companies inflation, a key measure of underlying worth pressures for rate-setters, held at 5 per cent in February, in line with the ONS. Economists had predicted a decline to 4.9 per cent.
Joe Nellis, financial adviser at accountancy agency MHA, mentioned the drop in headline inflation was “a welcome surprise for the government ahead of the Spring Statement, yet it is unlikely to undo the shift towards caution in the rate-cutting strategy of the Bank of England that has taken place in recent months”.
The determine comes as Reeves is ready to stipulate greater than £10bn of spending cuts in an try and restore a gap within the public funds attributable to anaemic progress and better borrowing prices.
Commenting on the inflation knowledge, Darren Jones, chief secretary to the Treasury, mentioned: “Our number one mission is kick-starting growth to raise living standards for working people, that is why we are protecting working people’s payslips from higher taxes.”
Merchants are at the moment placing a roughly 50/50 likelihood of a quarter-point rate of interest minimize on the BoE’s Could assembly, in line with ranges implied by swaps markets, up barely from earlier than the info.
Persistent worth pressures have prompted the BoE to take a “gradual” strategy to slicing rates of interest regardless of lacklustre progress. Final week, it held charges at 4.5 per cent.
The BoE expects inflation to rise to three.7 per cent within the third quarter, primarily due to increased vitality costs, earlier than slipping again to about 2.5 per cent throughout 2026, and reaching its 2 per cent goal in 2027. Nonetheless, earlier within the month, it warned it might “pay close attention to any consequent signs of more lasting inflationary pressures”.
February’s dip in headline inflation was “the calm before the storm,” in line with Rob Wooden, chief UK economist at Pantheon Macroeconomics.
He mentioned the rise within the nationwide dwelling wage and employer’s Nationwide Insurance coverage contribution introduced within the October Finances and taking impact from April 1, along with the vitality worth cap rising subsequent month, could be more likely to increase the headline inflation determine to three.5 per cent in April after which to a peak of three.7 per cent in September.
Wooden expects the BoE to chop rates of interest twice extra in 2025, however he mentioned the “persistence of underlying inflation” was elevating the chance of just one extra minimize this yr.
“The wild card, however, is President Trump. The April 2 tariff day could crystallise downside risks to the global economy that keep the MPC wanting to ease policy,” he mentioned.
