Sharp Decline In February’s Inflation Data Is A Welcome Tonic For Business

Today’s data from the Office of National Statistics, saw the headline rate of CPI inflation fall from 4.0% in January 2024 to 3.4% in February 2024, here is the view from business...

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UK inflation continued to cool in February, leaving headline CPI on track to achieve the BoE's 2% goal in the spring, with base effects providing a helping hand in dragging inflation down to 3.4% YoY last month. These effects, coupled with the upcoming fall in energy prices as the price cap is reduced, should see achievement of the MPC's mandate around April, though policymakers will seek more data than just the headline inflation rate before being ready to pivot towards rate cuts. Inflation persistence remains the key focus for MPC members, on which note the services CPI figure cooling to 6.1% YoY will be a very welcome sign, particularly as earnings growth also shows continued signs of cooling, even if the all-important services figure remains north of 6%, as it has done in every month since September 2022. On the whole, however, today's figure will do little to materially alter the BoE outlook, with the next move in Bank Rate still set to be a cut, probably in June, though Thursday's decision should see the MPC issue broadly unchanged guidance from that provided last month, with 2 members still likely to dissent in favour of a 25bp hike, and one for a 25bp cut, given the lack of substantial shifts in the economic backdrop since the last meeting. This helps explain the incredibly limited reaction in the GBP to the inflation figures, with the pound largely treading water ahead of the FOMC decision later today.

Michael Brown Senior Research Strategist at Pepperstone

David Bharier, Head of Research at the British Chambers of Commerce, said that today’s easing of the CPI rate to 3.4% will give businesses and consumers some sense of relief. At 4.5%, core inflation has also slowed, and the producer price index for input costs remains negative at –2.7%.

“These positive trends were to be expected as many of the key drivers have begun to fall away.

“However, we are now two years into this inflation shock and prices have simply stabilised at a much higher level. Uncertainty for businesses remains high. Further rises in the minimum wage are likely to impact pay differentials, and the ongoing crisis in Gaza, alongside shipping disruption in the Red Sea, is a source of great instability.

“It is also a concern that the owner occupiers’ housing (OOH) component of CPIH has risen by 6.0%, indicating the adverse impact of higher interest rates. This measure is likely to be exacerbated by further council tax rises.

“The fundamental issues for SMEs still remain - skills shortages, a lack of infrastructure investment, and trade barriers, particularly with the EU, which all feed into GDP growth expectations of less than 1% for the coming years.”

Over at the CBI Alpesh Paleja, Lead Economist, commented:

“Inflation is heading in the right direction, and should fall below the Bank of England’s 2% target sometime in the Spring. However, the path beyond this is likely to be bumpy: shifting base effects mean that it will likely rise back above 2% later in the year, before settling down more sustainably.

“While the Bank of England are likely to look through these ups and downs, they will still want to see more definitive movement on domestic price pressures before committing to cutting interest rates.”

Dr. Roger Barker, Director of Policy at the IoD, commented:

“Although a sharp decline in February’s inflation figures was largely anticipated by business, it is nonetheless reassuring to see concrete evidence of inflation falling to within striking distance of the Bank of England’s inflation target. The latest data provides concrete evidence that the inflationary battle is now well and truly under control, and provides justification for an early cut to interest rates.

“Inflationary pressures have now been largely squeezed out of goods markets, where inflation is running at only 1.1%. Price rises have also been moderating in the food, restaurants and hotel sectors, which until recently were significant areas of concern. However, there is still further to go in terms of service sector inflation, where prices are still rising at a stubbornly high rate of more than 6%.

“The journey towards lower inflation has been painful and costly for business. However, this data demonstrates that there is light at the end of the inflationary tunnel. Although business confidence in the UK economic outlook remains at depressed levels, today’s figures provide a welcome tonic.”

Julian Jessop, Economics Fellow at the free market think tank, the Institute of Economic Affairs, said:

"The latest drop in inflation demonstrates the urgent need for the Bank of England to begin cutting rates. The renewed slowdown in the headline rate - to 3.4% in February - paves the way for annual inflation to fall below the 2% target in April when the new Ofgem cap on energy bills kicks in.

"Indeed, the consumer price index has been little changed since September, meaning that shorter-term measures of inflation are now close to zero. This is consistent with the sharp slowdown in the growth of money and credit.

"Some underlying measures are still high, notably annual services inflation which is running at 6.1%. But with plenty of evidence that the labour market is cooling, and inflation expectations are dropping, fears of a ‘wage-price spiral’ should fade too.

"By far the bigger risk is that having been too slow to act when inflation was taking off, the Bank of England will now be even slower to respond on the way down."