Stay informed with free updates
Just sign up to Inflation in the UK myFT Digest: delivered straight to your inbox.
The U.K.’s inflation rate fell sharply in February, strengthening economists’ arguments that the Bank of England should start cutting interest rates this year as it makes progress in keeping price growth in check.
According to the Office for National Statistics, the consumer price index rose 3.4% year-on-year last month compared to 4% year-on-year in January. That left overall inflation below the 3.5% rate expected in a Reuters poll of economists.
Core inflation, which excludes food and energy, fell to 4.5% from 5.1% previously, also slightly lower than the 4.6% expected by economists.
The pound fell slightly after the data. The pound fell 0.03% against the dollar to 1.2716.
The fallout was taken with gratitude by Chancellor Jeremy Hunt, who called on Conservative MPs to hold their nerve after two weeks of turmoil in the party.
“The plan is working. Inflation has not only fallen sharply, but is expected to reach the 2% target within a few months,” Hunt said.
The BoE predicted in February that price growth was on track to fall to its target of 2% in the second quarter of the year as falling energy prices help reduce inflation in the UK. But he insisted that easing monetary policy is not yet possible given persistent growth in services prices and wages, warning of the risk that price growth will later regain ground.
Service price inflation fell to 6.1% from 6.5% in January, the ONS said, in line with BoE expectations. The arguments for continuing the BoE’s tough monetary policy hinge on the outlook for services inflation, which officials see as a key indicator of domestic price pressures as external drivers of inflation such as high fuel prices fade.
The central bank is also closely watching labor market indicators, particularly wage increases. Excluding bonuses, annual wage growth slowed to 6.1% in the three months to January in the UK, from 6.2% previously, still well above the level the BoE would be comfortable with.
The last time the BoE raised borrowing costs was August, pushing the key rate to 5.25%. He has since left policy unchanged, and City forecasters expect him to announce on Thursday that he will keep rates stable at that level.
This would be in line with the approach taken by the US Federal Reserve and the European Central Bank, which have both signaled that they will only start cutting rates when they have sufficient evidence that inflation is heading sustainably lower.
Soaring prices have taken a heavy toll on British household finances and, even after the recent slowdown in inflation, high prices are putting pressure on living standards. The latest forecasts from the Office for Budget Responsibility, the government’s fiscal watchdog, show that real disposable household incomes per capita will only recover to pre-pandemic peaks by 2025-26.