Britain’s inflation rate fell more sharply than expected to the lowest level in 2 1/2 years, keeping the Bank of England on track to reduce interest rates later this year.
The Consumer Prices Index rose 3.4 per cent in February from a year earlier, slower than the 4 per cent pace in January, the Office for National Statistics said March 20. The figure was lower than the median of 3.5 per cent predicted by economists and the BOE.
BOE Governor Andrew Bailey has signalled he needs to see further evidence that price pressures will fall back sustainably to the 2 per cent target before easing off on the benchmark lending rate. Officials are expected to leave interest rates at a 16-year high of 5.25 per cent on March 21, with financial markets only fully pricing in the first cut in August.
A core measure excluding energy, food, alcohol and tobacco fell as expected to 4.5 per cent from 5.1 per cent. But a key metric for policymakers – inflation in the services sector – fell less than expected to 6.1 per cent from 6.5 per cent.
Food prices and costs in restaurants and cafes helped to drag down the inflation rate, the ONS said.
The figures bring the UK closer to the inflation levels prevailing in the US and euro area, where policymakers are preparing to ease off on the monetary tightening imposed to get prices under control after the pandemic.
Prices are expected to slow further in March before temporarily dropping below the 2 per cent target in April.
BOE rate-setters may want to see April’s inflation and wages data before shifting to rate cuts when they will be weighing a large fall in energy bills, a wave of pay settlements for workers and the impact of annual increases in bills tied to previous inflation rates, such as mobile phone plans.
Britain had the worst inflation in the Group of Seven nations in 2023 after a jump in food and energy prices prompted workers to demand higher wages.
Living standards are now improving as wage growth outstrips price increases. However, the economy appears to recovering only slowly from a technical recession last year triggered by soaring interest rates and a cost-of-living crisis. The labour market, a key area of concern for BOE inflation fighters, is also showing signs of weakening.
It leaves Prime Minister Rishi Sunak facing a bleak backdrop for fighting a general election expected to be held in the second half of 2024. The BOE and private-sector economists expect growth of just 0.3 per cent in 2024, leaving Britain trailing most advanced economists for another year.
Chancellor of the Exchequer Jeremy Hunt has made it a priority to curb inflation.
Investors have pushed back expectations for rate reductions in 2024, fully pricing in the first quarter-point cut in August and only one more move of that size by the end of the year. At the start of the year, they were betting on 1.25 percentage points of cuts in 2024. BLOOMBERG
