Consumer price inflation in the United Kingdom cooled more than expected in February, official data showed Wednesday, fueling speculations that the Bank of England (BoE) may start cutting interest rates in the next few months as the cost-of-living crisis abates.
As measured by the Consumer Price Index (CPI), inflation fell to 3.4% – the lowest level since September 2021 – after hitting 4% in January, the Office for National Statistics (ONS) said. The agency said easing food price increases were mainly behind the fall.
The consensus had been for consumer prices to rise by 3.5% in February, according to the Bank of England and other economists.
The drop may boost embattled Prime Minister Rishi Sunak and his governing Conservative party as they face the prospect of losing a general election later this year amid discontent over the country's cost-of-living crisis.
Inflation is still running higher than the Bank of England's target of 2%, but the direction of the move appears clear. Inflation hit a high above 11% at the end of 2022 in the wake of Russia's invasion of Ukraine, which led to sharp increases in energy costs.
Food and selling prices in eateries were the biggest downward drags in February, according to the ONS, offset by an upward contribution from motor fuels.
Core inflation, which excludes energy, food and tobacco prices, also slowed to 4.5%, down from 5.1% in January.
The bigger-than-anticipated decline comes a day before the nine rate-setters at the BoE announce their latest interest rate decision. The view in financial markets is that they will keep the main interest rate at a 16-year high of 5.25%.
The meeting minutes will be assessed to see how much thought policymakers are giving to cutting interest rates, which should feed through to lower mortgage rates.
"Moderating inflation may encourage the bank to strengthen the signal for a first-rate cut in the second quarter," said Kallum Pickering, senior economist at Berenberg Bank.
The Bank of England, like the U.S. Federal Reserve (Fed) and other central banks around the world, raised interest rates aggressively in late 2021 from near zero to counter price rises first stoked by supply chain issues during the coronavirus pandemic and then by Russia's invasion of Ukraine, which pushed up food and energy costs.
Higher interest rates – which cool the economy by making it more expensive to borrow, thereby bearing down on spending – have contributed to bringing down inflation worldwide.
Economists forecast that the Fed and the European Central Bank (ECB) will begin cutting rates in June.
Economists say the BoE's outlook is less clear, even if rate cuts could lift Britain's recession-hit economy.
"The Bank of England has already said it's not going to cut interest rates in a hurry," Sarah Coles, head of personal finance at Hargreaves Lansdown, said following Wednesday's data.
"It's going to wait for lower inflation to bed in. It means there's a decent chance we won't see cuts until August."
Grant Fitzner, the ONS's Chief economist, said "almost unchanged" food prices were the "main driver" of the fall in U.K. inflation last month.
Offsetting this were rises in petrol prices and rents, he added.
Services inflation, which the BoE watches closely, slowed to 6.1% from 6.5% in January – as the central bank had expected last month.
On a monthly basis, the CPI rose 0.6% last month compared with a rise of 1.1% in February 2023, the ONS said.
'Decisive fall'
Treasury chief Jeremy Hunt welcomed the news.
"Inflation has not just fallen decisively but is forecast to hit the 2% target within months," Hunt said.
"This sets the scene for better economic conditions, which could allow further progress on our ambition to boost growth."
Hunt hopes that the fight against inflation will prompt the BoE to start cutting rates soon.
"What I'm really saying is that as inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates, which brings down mortgage rates. That makes a very big difference," he said.
With his Conservative party forecast to lose power to the main opposition, Labour, in the election, Hunt cautioned against "increasing borrowing or cutting funding for public services" to fund recent tax cuts.
Hunt announced a tax cut for millions of workers earlier this month as the government tries to persuade voters.
Sunak followed this up on Monday by launching measures to help small businesses navigate the weak economy.
Opinion polls show the Labour Party way ahead and headed for a big victory over the Conservatives, who have been in power since 2010.
Most speculation is that Sunak will call an election in the fall when the economic backdrop is likely to be more benign.
Labour's economy spokesperson, Rachel Reeves, said "prices are still high" despite the latest fall in the rate of inflation.
"After 14 years of chaos and uncertainty under the Conservatives, working people are worse off," Reeves said. "Prices are still high, the tax burden is the highest it has been in 70 years and mortgage payments are going up."