Inflation Falls to Lowest Level in Over 2 Years

A woman holds a shopping basket of groceries in Cardiff, Wales, on May 22, 2022. (Matthew Horwood/Getty Images)

Inflation eased in February, reaching the lowest headline rate for nearly two-and-a-half years, official data has shown.

Prime Minister Rishi Sunak welcomed the news of a 3.4 percent Consumer Prices Index (CPI) rise, down from 4 percent in January. When Mr. Sunak took office as prime minister, the inflation rate stood at its peak of 11.1 percent.

A Reuters poll of economists pointed to an expected annual rate of 3.5 percent. The lower than expected rate in February is “good news for you, your family and the country,” Mr. Sunak said on social media platform X.

At 3.4 percent, as reported by the Office of National Statistics on Wednesday, the rate is still higher than the Bank of England (BoE) target of 2 percent. Chancellor Jeremy Hunt said it was forecast to hit the target within months.

“The families today will heave a sigh of relief that we are firmly on track to bringing inflation down to its target 2 percent. This is the lowest headline rate for two-and-a-half years,” said Mr. Hunt.

Trends

The largest downward contributors to the monthly CPI rate came from food and non-alcoholic beverages, as well as restaurants and hotels.

The annual rate for housing and household services was at 2.9 percent in February, up from 2.5 percent the previous month.

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“Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and cafe price rises also slowed. These falls were only partially offset by price rises at the pump and a further increase in rental costs,” said Grant Fitzner, chief economist at the ONS.

The annual rate for food—at 5 percent in February—has eased for the 11th consecutive month from 19.2 percent in March 2023. The February figure is the lowest annual rate for food, restaurants, and hotels since January 2022.

Mr. Hunt said that food inflation easing was “most encouraging” and showed that the government’s plan is working.

“This sets the scene for better economic conditions which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work,” the chancellor added.

The government placed a 2 pence national insurance cut at the centre of its Spring Budget earlier this month, with a long term ambition to scrap the tax entirely.

Labour called it a “reckless unfunded plan” and warned it would drive up inflation and the cost of living. Shadow chancellor Rachel Reeves noted that the economy was still suffering from prices “rising in the jobs” and “mortgage payments ... going up.”

Bank of England

Ms. Reeves’s comments come ahead of Thursday’s meeting of the BoE’s Monetary Policy Committee (MPC), which sets the interest rate. The slowdown of inflation may move some MPC members to consider lowering the BoE’s benchmark rate, which currently stands at 5.25 percent.

However, the BoE has previously indicated that it needs more evidence of sustainable inflation easing before it lowers interest rates.

The bank expects inflation to hit its 2 percent target in the second quarter 2024, before increasing again in subsequent quarters.

“This profile of inflation over the second half of the year is accounted for by developments in the direct energy price contribution to 12-month inflation, which becomes less negative,” the BoE explained.

The 12.3 percent fall in the energy price cap that comes into force on April 1, is likely to contribute to lower inflation in the coming months.