British inflation falls ahead of Bank of England interest rate meeting

Inflation fell to its lowest level in two and a half years in February, fuelling hopes that the Bank of England will cut interest rates in the summer.

According to figures from the Office for National Statistics (ONS), the consumer price index (CPI) slowed to 3.4% in February from 4% in January, the lowest level since September 2021.

Inflation, the rate at which prices rise over time, has gradually declined since its highest level in 40 years, at 11.1 percent, in October 2022. However, a decline in inflation does not mean that prices are falling—it means that they are rising less quickly.

Grant Fitzner, chief economist at the ONS, said: “Food prices were the main reason for the fall. Prices have remained almost unchanged this year compared to a sharp rise last year, while prices in restaurants and cafes have also slowed.”

The drop is the fastest inflation fall in nearly half a century, according to the Resolution Foundation. The think tank believes the figures suggest the UK is on track to hit the 2% mark by April.

They say the Bank of England will be encouraged that services inflation fell to 6.1% in February, as this is a gauge of domestic inflation.

The core CPI (excluding energy, food, alcohol and tobacco) rose by 4.5% in the twelve months to February 2024, from 5.1% in January.

Inflation in the food sector fell from 7% to 5%, while inflation in the restaurant and hotel sector fell from 7% to 6%. Inflation in the communications sector fell from 8.2% to 5.6%.

Read more: Bank of England to keep key interest rates at 16-year high of 5.25 percent

Responding to the latest figures, Chancellor of the Exchequer Jeremy Hunt said the “plan is working.”

He said inflation had not only “fallen significantly” but was “forecast to reach the two percent mark within a few months.”

This will create the conditions for better economic conditions that could allow us to make further progress towards our objective of boosting growth and making work pay by reducing social security contributions, while working to eliminate double taxation on labour. But this will only apply if we do so without increasing borrowing or cutting funding for public services, he added.

The decline in inflation raises hopes that the Bank of England will cut its key interest rate in the summer.

Paul Dales, chief UK economist at Capital Economics, said the 3.4 percent consumer price index reading was “unlikely to make the Bank of England appear more dovish if it leaves the base rate at 5.25 percent tomorrow.”

Read more: When will interest rates fall – and what should you do?

However, he added: “We forecast consumer price inflation to collapse to 1.7 percent in April (BoE 1.9 percent), and – more notably – while the Bank expects a recovery to 2.7 percent by August, we expect it to fall to just under 1 percent.”

The story continues

“From April, consumer price inflation in the UK will be well below inflation in the US and the eurozone.

“This could prompt the Bank of England to start cutting interest rates in the summer (perhaps as early as June). Inflation of one percent could force it to cut rates to three percent next year, rather than four percent as investors expect.”

Regard: Which items in your shopping basket are taken into account for inflation?

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