UK inflation declines by more than expected in February

Inflation is still running higher than the Bank of England’s target of 2%, but the direction of the move appears clear

The inflation in U.K. alleviated more than expected in February, raising expectations that the cost-of-living crisis will abate and the Bank of England may start cutting interest rates in the next few months.

The Office for National Statistics said inflation, as measured by the consumer price index, fell to 3.4%, its lowest level since September 2021, from 4% in January.

The agency said easing food price increases were mainly behind the fall.

The decrease was more significant than anticipated. Analysts had expected a decline to 3.6%.

Inflation is still running higher than the Bank of England’s target of 2%, but the direction of the move appears clear.

At the end of 2022, inflation hit a high above 11% in the wake of Russia’s invasion of Ukraine, which led to sharp increases in energy costs.

The bigger-than-anticipated decline comes a day before the bank’s nine rate-setters announce their latest interest rate decision. Financial markets expect them to keep the primary interest rate at a 16-year high of 5.25%.

“Moderating inflation may encourage the bank to strengthen the signal for a first-rate cut in the second quarter,” said Kallum Pickering, senior economist at Berenberg Bank.

Higher interest rates – which cool the economy by making it more expensive to borrow, thereby bearing down on spending – have contributed to bringing down inflation worldwide.

Britain’s Conservative Party hopes lower inflation and falling interest rates may trigger a feel-good factor ahead of a general election by January 2025. Opinion polls show the Labour Party, the Main Opposition, is ahead and headed for a big victory over the Conservatives, who have been in power since 2010.

Most speculation is that Prime Minister Rishi Sunak will call an election in the fall when the economic backdrop is likely more benign.

Treasury chief Jeremy Hunt Chancellor Jeremy Hunt hopes that the fight against high inflation is being won and that the bank could soon cut rates.

“What I’m really saying is that as inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates, that brings down mortgage rates, that makes a very big difference,” he said.

Labour’s economy spokesperson, Rachel Reeves, said “prices are still high” despite the latest fall in the inflation rate.

“After 14 years of chaos and uncertainty under the Conservatives, working people are worse off,” she said.

“Prices are still high, the tax burden is the highest it has been in 70 years and mortgage payments are going up.”

Source: AP