UK inflation slides to 3.4%, below expectations

U.K. inflation came in lower than expected at 3.4% year-on-year in February, official figures showed Wednesday, down from 4% in January.

Month-on-month, the headline consumer price index rose by 0.6%, returning to positive territory after a -0.6% reading in January.

Economists polled by Reuters had expected an annual rate of 3.5% for February and a monthly rate of 0.7%, according to LSEG data.

The Office for National Statistics said the largest downward contributions came from food, restaurants and cafes, while the largest upward pressure came from housing and fuel.

Prices for food and non-alcoholic beverages rose by 5% year-on-year in February, down from 7% in January and the lowest annual rate since January 2022, the ONS said.

“The rate has eased for the eleventh consecutive month from a recent high of 19.2% in March 2023, the highest annual rate seen for over 45 years,” it added.

The closely watched core CPI figure — which excludes volatile food, energy, alcohol and tobacco prices — came in at an annual 4.5%, below a consensus estimate of 4.6% and down from 5.1% in January.

U.K. Finance Minister Jeremy Hunt said in a statement following the Wednesday print that falling inflation “sets the scene for better economic conditions.”

The Bank of England expects headline inflation to fall temporarily back to its 2% target in the second quarter before increasing again later in the year, after hiking interest rates aggressively over the last two years in order to get prices under control.

The central bank meets on Thursday to decide its next monetary policy move and is widely expected to keep interest rates unchanged at 5.25% as it weighs when to begin cuts.

“Following a torrid couple of years for U.K. households, this morning’s inflation print is yet further evidence that the outlook for consumers is brightening,” Zara Nokes, global market analyst at JPMorgan Asset Management, said in an email Wednesday.

She suggested that, the central bank would undoubtedly cheer the headline figure, but is unlikely to be convinced that “the battle against inflation is won.”

“More good news should be on the way with headline inflation likely to drop below the 2% inflation target in the Spring, but crucially, this is largely being driven by a transitory fall in energy prices,” Nokes added.

“The Bank will instead be keeping a watchful eye on the medium-term inflation outlook, particularly the domestically-generated inflation originating from the services sector.”