Page last updated at 11:18 GMT, Tuesday, 23 March 2010

UK inflation rate falls to 3% in February

Shop in Dalston, north-east London
The fall in inflation was more than analysts expected

The UK inflation rate fell to 3% in February from 3.5% the month before, official figures have shown.

The sharp drop in the Consumer Prices Index (CPI) inflation rate was greater than analysts had expected.

Retail Prices Index (RPI) inflation, which includes housing costs, remained unchanged at 3.7% in February.

The CPI inflation rate is the measure targeted by Bank of England interest-rate setters, while RPI is often used as a benchmark in wage negotiations.

Government target

The fall in CPI to 3% was slightly bigger than expected by economic analysts, who had forecast a drop to 3.1%.

INFLATION UPS AND DOWNS
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Price up
Footwear
Women's clothing
Down arrow
Price down
Toys
Computer games
Gas

A letter from the Bank of England's governor is required if inflation is more than one percentage point above or below the government's 2% target.

The rise in the CPI inflation figure to 3.5% in January had been put down to VAT returning to 17.5%.

There will now be hopes that that inflation has peaked, and will drop back below the bank's 2% target by the end of the year.

"It's the second month in a row that it's undershot the consensus," said Peter Dixon, economist at Commerzbank.

"It tells us that we can be pretty confident that the Bank of England's view that inflation will fall sharply this year is on track."

'Serious pressures'

However, the British Chambers of Commerce have warned against any rise in interest rates in the near future.

"The economy remains weak, businesses are still facing serious pressures, and it would be wrong for the MPC to contemplate early interest rate rises," said David Kern, chief economist at the BCC.

ANALYSIS
Hugh Pym, BBC chief economics correspondent

Bank of England governor Mervyn King has referred to the decade after the early 1990s as "the Great Stability", with inflation ticking along predictably. The latest figures show how much has changed. From an annual rate of just over 1% last September, the inflation rate rocketed to 3.5% in January. In February, it lurched back to 3%.

The restoration of the higher VAT rate and higher fuel prices played their part in pushing inflation up. Last month, price pressures were subdued across a range of products, including furniture, alcoholic drink and food. Gas bills for many households fell.

So Mervyn King will have something to smile about. Most analysts believe there is every chance inflation will fall back to its 2% target later this year. But it's much too soon to talk about a return to "the Great Stability".

"If, in the Budget, the chancellor presents a more credible plan for reducing the unsustainable deficit, it will be easier for the MPC to persevere with lower interest rates, making a business-led recovery possible."

UK interest rates have been at the record low level of 0.5% for 12 consecutive months, as the Bank of England seeks to aid the economic recovery.

The Office for National Statistics said that in February, recreation and culture made the largest contribution to the fall in the annual CPI rate, followed by housing and household services.

Lower utility prices have also helped bring down inflation.

Clothing and footwear added most to the annual rate.

"February's moderation in consumer price inflation was primarily due to utility price cuts and the fact that food prices rose much less than a year ago," said Howard Archer, economist at IHS Global Insight.

"It is also likely that many retailers put prices up less this February than a year ago following the ending of the post-Christmas clearance sales, as there was less sharp and extensive discounting in the sales in the first place."

Meanwhile, core inflation, which excludes food and energy prices, fell to 2.9% in February from 3.1%.



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