Inflation falls to 2.8%: Experts respond

UK inflation fell by more than expected in February, driven by a drop in clothing and shoe prices due to an unusually high number of sales.

Inflation decreased to 2.8%, down from a rate of 3% in January, according to the Office for National Statistics (ONS).

The latest figures come ahead of Chancellor Rachel Reeves’ Spring Statement, where she will set out her economic plans; women’s clothing was the biggest driver for this month’s fall only partially offset by small increases, for example, from alcoholic drinks.

Economists polled by Reuters had expected that inflation – which measures the rate at which prices rise – would dip to 2.9% in February. However, despite the bigger than expected fall, the figure is still above the Bank of England’s target of 2%. The rate of price rises is also expected to increase in the months ahead, with council tax and energy and water bills all set to rise in April.

In addition, a recent survey from the ONS found that almost a half of businesses are considering price rises as they brace for next month’s tax rises and increase in the National Living Wage.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said the Bank of England was unlikely to cut rates at its next meeting because February’s fall was “not an enormous change” and inflation “is still significantly above target”,

“Although policymakers won’t want to keep rates too high for too long given the stagnation in the economy, they are set to stay cautious with a rate cut looking more likely to come in June and another later in the year”, she said.

‘Stagflation’ fears

Reeves will address Parliament with her Spring Statement in Parliament on Wednesday afternoon, with further cuts to welfare spending expected; she is also expected to confirm a downgrade to official economic growth predictions.

Some economists have raised concerns about the possibility of ‘stagflation’, where prices rise faster than the central bank’s target but the economy fails to grow.

“Economic growth is miniscule and risks going backwards, but should inflation continue to refuse to get back near the 2% target, it is difficult to see what the Bank of England can do with interest rates,” said Lindsay James from wealth manager Quilter.

Chief Secretary to the Treasury Darren Jones said the government’s “number one mission is kickstarting growth” and pledged to go “further and faster on growth through our plan for change”.

Shadow chancellor Mel Stride said the Conservatives left government in July “with inflation bang on target” and urged Reeves take “urgent action” in her Spring Statement or “working families will continue to pay the price”.

The Liberal Democrats said the inflation figure “will be of no comfort to the millions of families across the country who are struggling”.

Experts comment:

M&A expert reacts to inflation drop and what it means for interest rates

In light of the surprise drop in inflation, my client Hamish Martin (partner at LAVA Advisory Partners, an M&A firm) has offered his thoughts on the significance of this news and what it might mean for interest rates…

Hamish Martin, Partner at LAVA Advisory Partners, said: “Inflation stabilising is a welcome sign that price pressures are gradually easing. The timing is no doubt a welcome boost ahead of the Chancellor’s Spring Statement, too.

“However, with inflation still above target, the Bank of England is unlikely to rush into interest rate cuts. While businesses and consumers will take some comfort in this trend, the real test will be whether inflation continues its downward path in the coming months as the major bodies predict, in which case we should be in good shape for a strong end to the year.”