Inflation falls again as energy bills ease

The Office for National Statistics said the largest downward effects last month came from electricity and gas bills, which on average fell this year between January and February

Inflation continued to fall last month as lower energy bills eased the pressure on UK households, but economists warn high petrol prices and drought risks to food crops could soon see prices tick higher again.

The headline rate of inflation eased to 3.4% in February from 3.6% in January, according to the Office for National Statistics (ONS), and retail price inflation dropped from 3.9% to 3.7%. That was the lowest since November 2010 but still slightly ahead of forecasts for a drop to 3.3% in a Reuters poll of economists.

The rate remains well above the Bank of England’s government-set target of 2% but policymakers will be hoping the latest fall confirms their prediction it will come back down to the target this year. Ahead of Wednesday’s budget, the government will also be hoping for inflation to ease further, boosting households’ disposable incomes, reviving consumer spending and thereby shoring up the lacklustre economic recovery.

But analysts highlight risks to inflation on the horizon.

“Further falls are likely in coming months, as retailers continue to struggle to attract hard-pressed consumers, although high oil prices mean the Bank of England’s expectation that inflation will drop below its 2.0% target by the end of the year could prove too optimistic,” says Chris Williamson, chief economist at Markit.

“Brent Crude at around $125 per barrel means rising oil prices will inevitably feed through to higher prices for a wide variety of goods and services. Most visible is the record prices paid for fuel at the pump, which will not only hit household travel costs but will also push up general transport costs.”

The ONS said the largest downward effects last month came from electricity and gas bills, which on average fell this year between January and February but rose a year earlier. Inflation was also pushed down by a record drop in photo equipment, with digital cameras being the main driver. There was also a record fall in the prices of pets, related products and services. The ONS said that was driven by falling dog food prices.

The largest upward pressures on inflation came from rising alcohol prices, spirits in particular, and vegetables. With droughts predicted for areas of the UK in coming months, there are warnings vegetable and other food prices will rise faster this year.

Vicky Redwood, chief UK economist at Capital Economics, said the downward trend in headline inflation could 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,” she said.

But the thinktank still sees inflation coming down over the year as a whole. “These factors should just slow the speed at which inflation falls, rather than preventing it dropping at all. We still think that inflation will be back below its target before the end of the year,” added Redwood.


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