UK inflation drops sharply as sterling strengthens

UK inflation drops sharply as sterling strengthens

The rise in the value of the pound against rival currencies has contributed to UK inflation falling in February by a greater amount than was expected.

Consumer Price Inflation (CPI) was 2.7 per cent in February, down from 3 per cent in January, according to data from the Office for National Statistics (ONS). The ONS said falling food, petrol and sea fares were behind the drop in inflation.

This remains above the Bank of England’s target of 2 per cent.

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Mike Bell, global market strategist at JP Morgan Asset Management, said the UK’s agreement of a transition deal with the EU - reached yesterday (19 March)  - could increase the likelihood of interest rates rising soon, as consumer and business confidence rises.

Rising consumer and business confidence would be expected to increase the level of consumer spending and business investment in the economy, both of which are inflationary.

Stephen Clarke, senior economic analyst at the Resolution Foundation, a think tank concerned with issues of social mobility, said: “Inflation finally fell this month, later than initially expected but further than analysts were predicting at the start of the year, thanks in part to falling energy prices and the unwinding of the impact of the post-referendum fall in the pound.

"Import-driven inflation is clearly slowing. Food and beverage prices are rising at a slower rate than last month and further falls are likely.

"We can also see a slowdown in transport inflation,  and the price of utilities is rising at a slower rate than before. Both are underpinned by a fall in the price of energy from its New Year highs.

“The sharp fall in inflation means we could be seeing an earlier end to the pay squeeze than previously expected, perhaps as early as this month."

If, as Mr Clarke said, wages grow at a faster pace than inflation in the coming months, that would tick the final box the Bank of England wants for it to put interest rates up three times in the coming years.

Speaking before the Treasury Select Committee in February, the Bank of England’s chief economist Andy Haldane said economic growth above 1.5 per cent, inflation above 2 per cent and real wage growth are the three conditions he and the bank want to see before rates can rise.