Some respite for UK consumers as inflation rate drops to 2.7%

Comment Martin Flanagan

Inflation has fallen to its lowest level since July last year, handing some relief to cash-squeezed households as the impact of the Brexit-hit pound starts to disappear.

Figures from the Office for National Statistics (ONS) show the Consumer Prices Index (CPI) cooled to 2.7 per cent last month, down from 3 per cent in January.

The outcome was lower than the 2.8 per cent predicted by economists and marked the first fall in inflation since December 2017.

Sterling’s slide since the Brexit vote has ratcheted up the pressure on household spending power, climbing from 0.6 per cent shortly after the EU referendum result to a near six-year high of 3.1 per cent in November 2017.

Slower growth from CPI eases the pressure on the Bank of England, which is widely expected to hike interest rates beyond 0.5 per cent in May.

The pound was marginally lower versus the US dollar at $1.402 following the announcement. Against the euro, sterling was up 0.2 per cent to €1.13.

Phil Gooding, ONS head of CPI, said: “A small fall in petrol prices alongside food prices rising more slowly than last year helped pull down inflation, as many of the early 2017 price increases due to the previous depreciation of the pound have started to work through the system.”

Transport prices dragged on the cost of living, securing a smaller month-on-month rise of 0.5 per cent in contrast to a 1.2 per cent jump last year. Petrol prices dropped by 0.2p per litre to 120.8p per litre on the month, while diesel slipped by 0.1p per litre to 124.4p per litre. Food prices were also applying downward pressure, lifting 0.1 per cent between January and February in contrast to a 0.8 per cent rise the year before.

All bad things come to an end. Anyway, the portents on annual inflation suddenly look a little better. The Brexit squeeze on British households has eased to its lowest since last July – 2.7 per cent in February, down from 3 per cent in January – as the Office for National Statistics said the chronic fall in sterling after the Brexit vote, making imports more expensive, had finally started to work its way through the system. For this relief, much thanks.

Wages growing at about 2.5 per cent now and additional expected falls in inflation as 2018 progresses are likely to also alleviate the real-terms pay squeeze we have been suffering. This will not be a V-shaped recovery in consumer sentiment, particularly if the Bank of England pushes through another quarter-point base rate rise later in the spring. But lower inflation will help both households and businesses.

Many City economists believe prices might now tread water for a few months before spiking downwards again later in the year. But talk of inflation reaching its mid-term target level of 2 per cent by this time next year does not seem fanciful. This should be helped by sterling, buoyed by the apparent agreement on a Brexit deal, continuing to lose its post-eu referendum weakness. That will ease the cost burden on our importers and the temptation to pass that on to the high street to protect profit margins. most high-profile of the latter businesses, admitted yesterday it got disrupted by the storms that were the kick in the tail of the winter just gone.

The group reported that the Beast from the East wiped nearly 1 per cent off its sales in the final week of its first trading quarter. Fortunately, the overall figures were decent for Ocado, with revenues showing double-digit growth. The company has been hit in recent times by a shortage of drivers and its average order size diminishing.

More positively, Ocado is confident of sealing more international tie-ups after signing a major international partnership and its first foray into North America.