The Consumer Price Index (CPI) has dropped to 3.4 per cent in February, marking its lowest level since September 2021.
The decrease exceeds forecasts, with experts predicting that inflation will continue to decline in 2024. Consensus projections point to a decline below the Government’s target to 2 per cent by late spring or early summer.
Reduced costs for goods and energy, along with the disinflation of food prices, are some of the factors that have contributed to this fall. These factors were major contributors to inflation in the previous year.
Hymans Robertson head of capital markets Chris Arcari says: “Headline CPI fell more than expected to 3.4 per cent in February, its lowest level since September 2021. Indeed, it is expected to fall further in 2024, with consensus forecasts expecting inflation to dip below the 2 per cent target in late spring and early summer, but at a slower pace than in 2023. Falls in energy and goods and food price disinflation – large detractors from headline inflation over 2023 – have largely run their course.
“Service-sector price and wage growth – two closely watched measures by the BoE – have started to ease, albeit from high levels, which is a good sign for core inflation. But elevated service-sector and wage inflation are signs of genuine domestic price pressures, and still too hot for the Bank of England’s Monetary Policy Committee (MPC) to justify an interest rate cut just yet, even if against a weak real growth backdrop. The Bank will tread cautiously, as it will be worried about a risk to its credibility and the impact on expectations if it cuts too soon and then has to reverse course. It will be interesting to see if last month’s highly unusual three-way split within the MPC is repeated.”
Aegon Asset Management fixed income investment manager James Lynch says: “Another large drop in the headline inflation rates in the UK this morning. CPI fell from 4.0 per cent in January to 3.4 per cent in February. According to the ONS data the largest downward contributions came from food, restaurants, and cafes – that is logical given the previous huge prices rises we have seen in the past in these categories could not be maintained. Food inflation peaked in the UK at 19.2 per cent in March 2023 and has now dropped to 5 per cent, and with further indications this fall is expected to continue which will have a knock on effect in different categories of the inflation basket.
“Looking forward over the next few months we still expect to see CPI inflation in the UK to start with a 1 per cent as soon as the April print. In large part to the fall in food and indeed the OFGEM energy price cap change.
“We have the MPC meeting of the BoE tomorrow (21st March) where once again rates are expected to remain on hold at 5.25 per cent. Last month two members voted for a hike in interest rates, one for a cut and six for unchanged rates. Given the sluggish economy, looser labour market, and high confidence that inflation will be below target in the coming months, it is a struggle to see why two members believe interest rates still need to move higher. So if there is a change tomorrow this is where I would expect it to come with a change in the voting pattern.”
Standard Life managing director for retail direct Dean Butler says: “This is the first significant fall in inflation we’ve seen for a few months and the news will come as a huge relief to households, hopefully bringing some much needed springtime positivity after what’s been another hard winter. With the energy price cap set to fall from the 1st April too, we’re hopefully on a trajectory to a less challenging set of economic conditions. As we move closer to the Bank of England’s 2 per cent inflation target, there will undoubtedly be a resurgence of speculation around when they’ll move to cut the base interest rate, lowering the cost of borrowing but reducing returns on savings.
“For those who are able to save, now’s a good time to shop around for best-buy accounts. If the Bank of England do decide to lower interest rates soon, it’s likely some of today’s inflation-busting deals will disappear. People are famously loyal to their bank, but securing the best possible rate really can make a difference over a couple of years – our analysis found that if inflation fell to the Bank of England’s target of 2 per cent, someone with £10,000 to save who grabbed a 5 per cent interest deal could see their savings worth £10,588 in real terms after two years. However, someone with the same amount to save who missed the best offers and picked up a 3 per cent deal would have £400 less after two years (£10,189).
“For those with a greater appetite for risk, investing offers a greater chance of substantial returns, but there’s always the chance of losing money too. People able to take a long-term view could consider saving into a pension, which offers both the benefits of investing and tax efficiency.”
Royal London Asset Management senior economist Melanie Baker says: “The expected fall in inflation in February, at least on my forecasts, was going to be more about base effects in core inflation and it looks like that has played a role; the month-on-month increase in core CPI was more ‘normal’ compared to last year.
“Energy was a key upward contributor to the move in year-on-year CPI inflation in February, due to transport fuel. Offsetting this, though, there were large downside contributions to inflation in February from food and restaurants and cafes, apparently largely driven by alcohol. What I’d call core goods inflation, non-energy industrial goods, slowed from 2.7 per cent year-on-year to 1.9 per cent. Most of the main categories of prices contributed negatively to the move in CPI inflation this month though.
“In terms of key indicators of underlying inflation pressure or domestically driven inflation, things were also more encouraging than last month. Services inflation clearly remains at very high levels but, except for housing services, where rental inflation picked up, the main categories of services inflation all slowed at least a bit.
“Many of the major central banks at this stage seem to want more confidence and more evidence that inflation is on track to sustainably hit inflation targets before starting to cut rates. As far as it goes, today’s data should be modestly encouraging from a Bank of England perspective – headline CPI was a tenth below the staff forecast from February’s Monetary Policy Report and services inflation was in line with the staff forecast.
“Headline inflation looks likely to fall to a bit below 2 per cent over April-June partly on cuts in energy bills, but that doesn’t mean it will stay there. Last week’s unemployment and pay growth data were consistent with more loosening in the labour market, but annual pay growth is still strong and services inflation on today’s figures is clearly still at high levels. For now, I’m still assuming the first cut comes in the second half of the year, but with risks skewed towards an earlier move and more so than before today’s data.