The UK’s headline rate of inflation fell to 3.4 per cent in February, down from 3.6 per cent in January, according to the latest figures.
The Office for National Statistics (ONS) attributed the decline in the consumer prices index (CPI) to downward pressures from domestic electricity and gas, recreation and culture, and transport, but said that these were offset by alcohol sales and the price of vegetables.
The retail price index (RPI) rate of inflation also dropped in February and now stands at 3.7 per cent, from 3.9 per cent in the previous month.
RPI inflation saw downward pressures from motoring expenditure and fuel and light, and upward pressure from alcoholic drink.
However, analysts expected a larger fall in CPI annual inflation to around 3.3 per cent in February.
Vicky Redwood, chief UK economist at Capital Economics, acknowledged that ‘progress has slowed’ as the boost from last year’s VAT hike continues to fade and warned that the downward trend in the headline rate was likely to ‘pause’ over the next couple of months.
‘Indeed, inflation could even rise in March on the back of the continued rise in petrol prices. And a possible rise in food prices in response to the droughts adds to the near-term upside risks to inflation.
‘However, these factors should just slow the speed at which inflation falls, rather than preventing it drop at all. We still think that inflation will be back below its target before the end of the year,’ Redwood added.
Schroders’ European economist Azad Zangana agreed, ‘Whilst the latest inflation estimates are slightly higher than expected, we do not expect the Bank of England to be phased.
‘Inflation is on a clear downwards trend and given the weakness of the economy, we believe the Bank of England is likely to increase the size of its quantitative easing programme in the near future, with a rise in interest rates still some way beyond the horizon.’