The ONS has reported another drop in inflation. The consumer prices index (CPI) dropped to 2.8% last month, falling from 3% in January. This reinforcement has increased the chances that the Bank of England will cut interest rates in May. Meanwhile, core inflation, minus the typically more volatile food and energy sectors, has fallen. It dropped from 3.7% in January to 3.5%.
The Bank of England remains on the sidelines. It has recently signaled that inflation could re-peak at roughly 3.7% later this year. Even after the recent easing, inflation in the services sector is still extraordinarily high at 5%. The central bank’s target is 2%. Yet prices, the ONS was keen to point out, are still increasing year-on-year. They are outpacing overall job growth by a rate of three to one.
The main driver behind February’s inflation drop was the clothing category, especially women’s clothes. Grant Fitzner, the ONS chief economist, explained that the decline was "only partly offset by small increases, for example, from alcoholic drinks."
With inflation cooling, the likelihood of the central Bank of England cutting interest rates has increased. Nothing is more frustrating than borrowers not receiving the relief they’ve earned. The ONS’ most recent figures give a 55% probability that the central bank will cut its key base rate. If it does, the rate would be lowered by at least a quarter-point to 4.25% on May 8. City investors are forecasting only two more quarter-point rate cuts this year. For instance, this would bring the full employer rate down to 4%.
During this period, the Bank of England has stressed a “gradual and cautious” approach to cutting interest rates. The recent softening of inflation plays into this cautious playbook since it provides room for further adjustments without jeopardizing a hard-won momentum in economic growth.
Business leaders have expressed concerns over upcoming financial pressures, particularly regarding the autumn budget's increase in employer national insurance contributions. Taken together, this change will incentivize companies to reduce headcount. They will raise prices, introducing another complicating wild card to the economic equation.
"February’s slowdown is a false dawn as notable near-term price rises are already baked in, with next month’s jump in energy bills and national insurance likely to push inflation perilously close to 4% sooner rather than later," said Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales.
Our government is committed to ensuring that we continue to deliver economic growth and keep working people’s paychecks safe. Darren Jones, the chief secretary to the Treasury, addressed these concerns by stating, "Our No1 mission is kickstarting growth to raise living standards for working people, that is why we are protecting working people’s payslips from higher taxes."