Inflation has slowed once again, to 3.4 per cent in the 12 months to February, down from 4 per cent in January. This takes the inflation rate to its lowest level in two and a half years, and keeps inflation on track for the Bank’s target of 2 per cent this spring.
The fall in the headline rate was slightly bigger than expected – economists had forecast 3.5 per cent – driven by a fall in food prices, which slowed from 7 per cent on the year to January to 5 per cent in February. Restaurant and cafe prices also contributed to the falling rate: down to 6 per cent in February, compared to 7.1 per cent the month before.
All remains on track for inflation to return to the Bank’s target of 2 per cent in April, when Ofgem’s latest energy price cap kicks in and higher energy costs fall out of the data. Some independent forecasters are now expecting the rate to fall below 2 per cent (Capital Economics this morning forecasts 1.7 per cent on the year in April), though it is expected the headline rate will rise again later in the year – albeit nothing like what we’ve seen the past few years.
While today’s update from the Office for National Statistics has delivered good news, don’t expect it to have changed tomorrow’s announcement on interest rates. This most recent slowdown is unlikely to have swayed members of the Monetary Policy Committee to start their slow and steady process of cutting rates just yet. More recent language from the MPC about wanting inflation to return to target for the medium-term means the committee is likely to wait a while longer before cutting its 5.25 per cent base rate.
But the data is moving in the right direction for this decision to come relatively soon – possibly at the MPC’s meeting in May or June. As the inflation rate continues to fall, the Bank will be under more pressure to take action – not least as growth figures remain stagnant. The Bank has already been accused of contributing to Britain’s dip into recession at the end of last year (which is likely over now, but won’t be confirmed for months) and the dismal growth figures predicted for this year. The latest forecast from the Office for Budget Responsibility put GDP growth for 2024 at just 0.8 per cent.
This was indeed the point of raising rates: to curb people’s spending habits and to take heat out of the economy in order to get inflation under control. But plenty of stakeholders now want to see the Bank’s attention turn to rates. This includes the government.
It’s been a big week of economic news, with the Prime Minister making another pitch to MPs and voters to stick to his economic plan. Shadow chancellor Rachel Reeves delivered the Mais lecture last night – an opportunity to get deeper insight into her economic thinking and worldview. Ministers will be relieved to have some good economic news to share off the back of Reeves’s many criticisms of the government’s handling of the economy. But there’s no substitute for consumers feeling personally better off: something that has yet to be achieved.
Listen to Kate Andrews, Katy Balls and Max Jeffery discuss the inflation figures on Coffee House Shots:
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