Hopes of summer rate cut boosted after bigger-than-forecast fall in inflation

Inflation eased back by more than expected in February, boosting hopes that a cut in interest rates could be on the cards within months.

Official figures showed Consumer Prices Index (CPI) inflation fell to 3.4% in February, down from 4% in January and the lowest level since September 2021, thanks to the cost of food and eating out rising more slowly.

Chancellor Jeremy Hunt hinted that the “decisive” drop in inflation could give him room to further reduce national insurance, but played down suggestions that this would mean pre-election tax cuts in an autumn statement.

Experts said inflation is now likely to fall back below the Bank of England’s 2% target in April or May, thanks to the scheduled 12% fall in the energy price cap on April 1.

This could pave the way for the Bank to start cutting rates possibly as early as June, according to many economists.

Mr Hunt said: “Inflation has not just fallen decisively but is forecast to hit the 2% target within months.

“This sets the scene for better economic conditions which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work.”

He told broadcasters: “As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates, that brings down mortgage rates, that makes a very big difference.

“It’s far too early to know whether we’ll have another fiscal event before the election, but what I would say is that what you can see is the difficult decisions the Government has taken over the last year are paying off.”

The data shows inflation finally resuming its retreat, having unexpectedly lifted in December and then remaining unchanged in January.

It was also a bigger fall than forecast, with most economists expecting inflation at 3.5% last month.

The data comes ahead of the latest interest rate decision on Thursday.

Policymakers are widely expected to keep rates on hold at 5.25%, but the steep fall in the CPI has reinforced expectations that the Bank is moving closer to cutting rates.

The inflation data also follows official figures last month confirming that the UK fell into recession at the end of last year, with the economy contracting for two quarters in a row.

James Smith, an economist at ING, said: “A 12% fall in household energy bills due in just under two weeks should take headline inflation below 2% in either April or May.

“It’s likely to stay below the Bank of England’s target for much of 2024, especially when you consider we may well see another double-digit percentage point fall in energy bills in July when the regulator again updates the household price cap.”

He is pencilling in the first rate cut in August, or possibly as early as June.

The ONS said it is “not seeing” any sign yet of an impact on consumer prices from the Red Sea disruption, following attacks by Houthi rebels on cargo ships going through the trade route.

There had been fears that it could push up food costs, as well as prices on clothing and goods, in particular from Asia.

ONS chief economist Grant Fitzner told BBC Radio 4’s Today programme: “There has been a lot of speculation about the Red Sea in coming months, but we’re really not seeing that either in the inflation numbers or in the trade statistics.”

The latest data showed annual food price inflation fell back to 5% in February, down from 7% the previous month and the lowest level for just over two years.

On a monthly basis, food inflation lifted by 0.2% – far lower than the steep rises seen a year earlier.

The cost of eating out in restaurants and cafes also eased back, with the annual rate of inflation falling to 6.7% last month from 8.2% in January.

But this was partially offset by rising costs at fuel pumps, with the average price of petrol up by 2.3p a litre between January and February to stand at 142.2p a litre, though this was still lower than the 148p a litre seen a year earlier.

The latest data also showed the CPI measure of inflation including housing costs (CPIH) fell to 3.8% in February from 4.2% in January, while the Retail Prices Index (RPI) fell back to 4.5% from 4.9%.