UK inflation slows more than expected to 2.8%

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UK inflation unexpectedly fell to 2.8 per cent in February, in a boost to chancellor Rachel Reeves as she prepares to deliver a high-stakes Spring Statement.

The annual increase in consumer prices, reported by the Office for National Statistics on Wednesday, was below the 2.9 per cent forecast by economists in a Reuters poll and the 10-month high of 3 per cent recorded in January.

The decline was driven by a fall in clothing prices, which dropped 0.6 per cent in the 12 months to February, marking the first contraction since October 2021.

However, services inflation, a key measure of underlying price pressures for Bank of England interest rate-setters, held at 5 per cent in February, according to the ONS. Economists had predicted a decline to 4.9 per cent.

Joe Nellis, economic adviser at accountancy firm MHA, said the drop in headline inflation was “a welcome surprise for the government ahead of the Spring Statement, yet it is unlikely to undo the shift towards caution in the rate-cutting strategy of the Bank of England that has taken place in recent months”.

Line chart of Annual % change on consumer price index showing UK inflation eased, but services price growth remained high

The figure comes as Reeves is set to outline more than £10bn of spending cuts in an attempt to repair a hole in the public finances caused by anaemic growth and higher borrowing costs.

Responding to the inflation data, Darren Jones, chief secretary to the Treasury, said: “Our number one mission is kick-starting growth to raise living standards for working people, that is why we are protecting working people’s payslips from higher taxes.”

Traders are pricing a roughly 50/50 chance of a quarter-point interest rate cut at the BoE’s next meeting in May, according to levels implied by swaps markets, up slightly from before the data.

Persistent price pressures have prompted the central bank to take a “gradual” approach to lowering borrowing costs despite lacklustre growth. Last week, it held rates at 4.5 per cent.

The BoE expects inflation to rise to 3.7 per cent in the third quarter, primarily because of higher energy prices, before slipping back to about 2.5 per cent during 2026, and reaching the official 2 per cent target in 2027.

However, earlier in the month, the central bank warned that it would “pay close attention to any consequent signs of more lasting inflationary pressures”.

February’s dip in headline inflation was “the calm before the storm”, according to Rob Wood, chief UK economist at Pantheon Macroeconomics.

He said the increase in the national living wage and employer National Insurance contributions announced in the October Budget and taking effect from April 1, together with the energy price cap rising next month, would be likely to boost the headline inflation figure to 3.5 per cent in April and then to a peak of 3.7 per cent in September.

Wood said that while he expected the BoE to cut rates twice more in 2025, the “persistence of underlying inflation” was raising the likelihood of only one more cut this year.

“The wild card, however, is President Trump. The April 2 tariff day could crystallise downside risks to the global economy that keep the Monetary Policy Committee wanting to ease policy,” he said.

Separate ONS data on Wednesday showed rental prices increased in February at the slowest pace since mid-2023, pointing to some relief for tenants after three years of a sharp squeeze for tenants.

Average monthly private rents rose by an annual rate of 8.1 per cent in February, down from 8.7 per cent in January and from a record high of 9.1 per cent in March 2024.

It was the lowest annual rate of increase since the 7.9 per cent registered in July 2023, the statistics agency said.

In the 12 months to January, average UK house prices rose by 4.9 per cent to £269,000, marking the sixth consecutive increase and taking property costs to their highest in two years.