Inflation cools, but spring rate rise still on cards

21 March, 2018, 08:15 | Author: Shannon Aguilar
  • Small fall in house prices says ONS

"The Consumer Prices Index 12-month rate was 2.7 percent in February 2018, down from 3.0 percent in January 2018", the Office for National Statistics said in a statement on Tuesday.

And the situation could improve further this year, according to the Bank of England.

The level of inflation fell in February, with the worst of the Brexit driven prices increases seen in the United Kingdom in the last 18 months now appearing to be over.

Petrol prices fell by 0.2p per litre on the month, while diesel dropped by 0.1p.

Meanwhile, the Retail Prices Index (RPI) measure of inflation - which is used to calculate telecoms and rail increases - fell from 4 per cent to 3.6 per cent.

"We estimate that consumer price inflation dipped from 3.0% in January to 2.8% in February, as the impact of sterling's past depreciation continued to fade", says Liam Peach, an economist at Capital Economics.

Food prices were also applying downward pressure, lifting 0.1 per cent between January and February in contrast to a 0.8 per cent rise the year before.

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Last year's figure was boosted by a shortage of salad and vegetables, when crops in southern Mediterranean countries were hit by bad weather.

"A small fall in petrol prices alongside food prices rising more slowly than a year ago helped pull down inflation", Phil Gooding, the ONS' head of consumer price inflation said.

The main upward pressure on the cost of living came from clothing and footwear prices, which rose by 1.7% on the month - compared to 1.2% in 2017 - as women's shoes became more expensive.

It increased interest rates in November for the first time in more than a decade. As the post-referendum currency effect fell out of the year on year comparisons, price rises were always likely to ease back. The fact that Easter is early this year could push inflation back up again in March.

However, Tuesday's number - which the Bank of England was given special early access to - suggests that inflation is set to fall sharply as the year progresses, potentially slowing the pace of any BoE rate hikes in 2018.

"The drop in inflation. creates some breathing space for the BoE's Monetary Policy Committee when it comes to increasing interest rates", said Kevin Doran, chief investment officer at AJ Bell.

"We think that the MPC will refrain from ratcheting up its guidance and won't clearly signal an imminent rate rise in the minutes of Thursday's meeting, prompting markets to reassess their view that the chances of a May rate hike are as high as 80%".

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