Market News

BY Tom Rees, Philip Aldrick and Irina Anghel

(Bloomberg) -- UK inflation unexpectedly cooled, strengthening the case for the Bank of England to cut interest rates again in May and providing a morale boost for Chancellor of the Exchequer Rachel Reeves ahead of a key economic statement Wednesday.

Consumer prices climbed 2.8% in February from a year earlier, slowing from 3% the previous month, the Office for National Statistics said. It was below the 3% economists were expecting on average and in line with the 2.8% predicted by the BOE last month.

Clothing prices were the biggest driver of the slowdown, while goods price inflation also eased, the ONS said. The pound extended losses, falling as much as 0.2% to $1.2918. Money markets added to rate cut bets and now see a 75% chance of a reduction in May.

The figures come hours before the chancellor unveils her highly-anticipated spring statement, in which she is expected to slash government spending to put the public finances back on track and downgrade growth forecasts made less than six months ago. Reeves has argued that, by sticking to her fiscal rules, she has brought the stability needed for the BOE to cut interest rates and bring down mortgage costs for millions of Britons.

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“Both the Bank of England and the Chancellor will be somewhat relieved by the drop in headline inflation,” said Luke Bartholomew, deputy chief economist at Aberdeen. “Slightly lower inflation should also mean less pressure on gilt yields, which remain a major concern for the Chancellor.”

Chief Secretary to the Treasury Darren Jones said in a statement: “Our number one mission is kickstarting growth to raise living standards for working people, that is why we are protecting working people’s payslips from higher taxes.”

The fall in inflation is likely to be temporary with the BOE expecting inflation to accelerate toward 4% later this year — double the 2% target — on the back of energy and other administered prices. However, Governor Andrew Bailey has said easing underlying pressures should allow rates to continue on a “gradually declining path.”

Services inflation, which is being closely watched by the central bank for signs of domestic price pressures, stayed at 5%. The BOE had predicted 5.1%. Core inflation — which excludes food, alcohol, tobacco and energy prices — slipped back to 3.5% from 3.7%.

What Bloomberg Economics Says...

“February’s drop in CPI inflation keeps the Bank of England on course to lower rates in May. Still, there were signs in the data that the downward trend in underlying metrics of price pressure could be stalling. That will keep the BOE cautious and could mean it opts to take an extended pause later this year rather than cutting at a quarterly cadence, which is our current baseline.”

-Dan Hanson and Ana Andrade. Click ot read the REACT on the Teminal

Clothing and footwear prices fell 0.6% in February, declining for the first time since October 2021. The move was driven by women’s clothes, as well as hats and scarves. Clothing prices normally increase in February when new spring products replace sales items, the ONS said. Goods-price inflation fell to 0.8% from 1%.

“February’s slowdown is a false dawn as notable near-term price rises are already baked in, with next month’s jump in energy bills and national insurance likely to push inflation perilously close to 4% sooner rather than later,” said Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales.

--With assistance from Joel Rinneby and Mark Evans.