Inflation cools, but spring rate rise still on cards

The Consumer Prices Index (CPI) rate of inflation fell to 2.7 per cent in February, down from 3 per cent in January, according to the latest data from the Office for National Statistics (ONS).  

This reduction in inflation has been led primarily by falling transport costs – most notably motor fuels and sea fares. The cost of eating out and staying in hotels has also fallen, along with food and non-alcoholic drinks. However, falls across these areas were partially offset by the rising cost of clothing and footwear.

The ONS’ preferred measure of inflation, the Consumer Prices Index including owner occupiers’ housing costs (CPIH) stood at 2.5 per cent in February 2018, down from 2.7 per cent in the year to January.

Commenting on the figures, Tom Stevenson, investment director for personal investing at Fidelity says: ‘Inflation is easing from its recent peak of 3.1 per cent. February’s reading of 2.7 per cent was slightly lower than expectations and 2.5 per cent for underlying inflation is in line with forecasts. As the post-referendum currency effect fell out of the year on year comparisons, price rises were always likely to ease back. The recent rise in Sterling has accelerated the trend.’

Meanwhile, the Retail Prices Index (RPI) measure of inflation – which is used to calculate telecoms and rail increases – fell from 4 per cent to 3.6 per cent.   

Experts predict this fall in inflation means the Bank of England is likely to increase base rate from its current 0.5 per cent. Mr Stevenson comments: ‘Attention will turn now to the Bank of England’s rate-setting decision on Thursday. With inflation still above the Bank’s 2 per cent target, we should expect the Monetary Policy Committee to raise the base rate from its ‘emergency’ level in due course. This is unlikely to be this week but a May hike now looks odds on.’

Kevin Doran, chief investment officer at financial provider AJ Bell takes a similar view. He says: ‘The drop in inflation creates some breathing space for the Bank of England’s Monetary Policy Committee when it comes to increasing interest rates. However, solid economic data and the risks around Sterling depreciating further, especially as we move closer to the realities of implementing Brexit, are likely to see Mark Carney and the fellow members remain poised to raise rates again in the near future.’ 

However, Mr Doran adds that a rate rise is only likely to be moderate and offer little in the way of respite for frustrated savers.

‘Even if interest rates do start to rise, any progress is likely to be slow and there is a long way to go before savers will see returns that even break even with inflation.’

-UK inflation: where’s it heading in the long term?

This article was orignally written by our sister publication Moneywise.

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