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UK Inflation Falls to 2.8% in February but Further Rises Expected

Inflation in the UK dropped to 2.8% in February, down from 3% in January, according to official data released ahead of Chancellor Rachel Reeves’ Spring Statement. The unexpected dip provided temporary relief but underlying economic pressures suggest inflation could rise again later this year.

Figures from the Office for National Statistics (ONS) showed that consumer price inflation came in below analysts’ expectations of 2.9% and aligned with the Bank of England’s forecast. However, economists anticipate inflation could peak around 3.7% later in the year due to increasing energy and utility costs.

Core Inflation and Sector Trends

Core inflation, which excludes volatile items like food and energy, also declined slightly from 3.7% to 3.5%, defying forecasts of an increase. Despite this, inflation in the services sector remained high at 5%, indicating persistent domestic cost pressures.

The ONS attributed February’s inflation decline to the steepest drop in clothing prices in four years, with women’s fashion, accessories, and children’s clothing driving the decrease. Clothing and footwear prices fell 0.6% year-on-year, marking the first decline since October 2021. Meanwhile, inflation for housing costs, including rent, also eased alongside lower prices for live event admissions.

Conversely, alcohol and tobacco prices surged, with inflation in this category rising from 4.9% to 5.7%, largely due to tax increases implemented at the start of the month.

Policy Implications and Economic Outlook

The inflation report comes as Chancellor Reeves prepares to deliver her first Spring Statement, navigating economic challenges posed by rising inflation and high interest rates. These factors are increasing government debt servicing costs and impacting public spending on benefits and pensions linked to inflation.

The Bank of England, which previously reduced interest rates from 5.25% to 4.5% over the past year, is expected to adopt a cautious approach. Market analysts predict only one or two further rate cuts in 2024, as policymakers remain wary of inflation driving wage growth, which could in turn lead to sustained price increases.

In a broader international context, UK inflation now aligns with the eurozone’s 2.3% and the United States’ 2.8%, suggesting global trends are influencing the British economy.

Economists Remain Cautious

Despite February’s decline, economists warn against assuming inflation is under control. Paul Dales, Chief UK Economist at Capital Economics, cautioned, “The dip in CPI inflation is a bit of a red herring as inflation will probably be back above 3% in April and around 3.5% by September.”

However, Yael Selfin, Chief Economist at KPMG, offered a more optimistic outlook, stating, “The Bank of England will be reassured by today’s fall in underlying inflation. We expect inflationary pressures to ease further, potentially allowing the Monetary Policy Committee to resume rate cuts in May.”

With inflation showing short-term relief but projected to rise again, businesses and consumers will be closely watching the government’s next economic moves.

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