UK inflation dropped to 3.4% in February, the lowest rate for two and a half years, as the annual pace of price hikes started to slow after surging in January.
UK Inflation falls to 3.4% in February Raising Hopes for Interest Rates
The better-than-expected forecast decline represents an important boost for the Prime Minister, Rishi Sunak, who made lowering inflation one of his key economic vows. This also increases the chances of interest rate cuts by the Bank of England earlier this summer.
Most experts anticipated a 3.5% drop in February, the lowest inflation rate since September 2021, when it reached 3.1%. A reduction in inflation rates does not automatically translate to lower prices; it means that they are rising at a slower pace.
The latest data shows a gradual evolution towards the Bank of England's 2% target and comes ahead of Thursday's interest rate decision.
Financial markets are expecting policymakers to keep interest rates still at 5.25%; however, the fall in inflation rates noted today boosts the chances of them being reduced during summertime.
Paul Dales, the chief UK economist at the consultancy Capital Economics, stated: “Our view that inflation will fall below 2% in April and then ease towards 1% suggests the BoE may have to start cutting rates in the summer and reduce them to 3% next year.”
February CPI Shows Broad-Based Decline in Inflation Across Categories
February's CPI fall extended to most categories, with food inflation dropping from 7% to 5% and hotel and restaurant price inflation reaching 6% from the previous 7%.
The measure of core inflation, which exceeds volatile products like food prices and oil, decreased from 5.1% to 4.5%.
Services inflation, which is carefully monitored by the central bank for indications that inflation is easing, decreased by 0.1 percentage points less than expected to 6.1% from 6.5%.
Paul Dales said: “Accordingly, inflation is no more persistent than the BoE expected and is moving in line with the path that the BoE has hinted would warrant interest rate cuts.”
The Chancellor, Jeremy Hunt, highlighted that inflation had fallen "decisively", suggesting that the government's financial plans were working.
“This sets the scene for better economic conditions, which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work—but only if we can do so without increasing borrowing or cutting funding for public services, he remarked.
His Labour Party counterpart, Rachel Reeves, disregarded Hunt’s claim. The shadow chancellor said prices remained high while “the tax burden is the highest it has been in 70 years and mortgage payments are going up”.
In a year-over-year comparison, annual inflation was 10.1%, down from a peak of 11.1% in October 2022.