Sarah Coles, head of personal finance at Hargreaves Lansdown, warns that today’s drop inflation could reverse in a month’s time: “Like an over-refreshed pub-goer after midnight, inflation has staggered uncertainly in a new direction again, falling from 3% to 2.8%. It’s not a major shift, but it’s not what markets were expecting. It’s expected to lurch back to growth again next month, and then keep rising in April once the price rises of Awful April kick in. There was no change to food inflation last month, but retailers are warning that prices will accelerate later this year as rising costs are passed onto consumers. Food and non-alcoholic beverages inflation was 3.3% in the year to February, matching January’s reading. Kris Hamer, director of insight of the British Retail Consortium, warns that “Headline inflation fell marginally in February, driven by marginal drops in housing and household services and clothing and footwear entering deflation. Despite continued cost pressures, namely energy price volatility, food inflation remained unchanged. There was good news as some dairy products such as milk, cheese and eggs all saw price drops on the month. Heavy clothing and footwear discounting continued into February, as fashion sales continue to suffer due to unseasonal weather throughout the month.” “Retail operates on tight margins and it would be impossible to absorb all £5bn of new costs which hit the industry in April. Food inflation has jumped significantly in recent months and is forecast to hit 5% by the end of 2025 as a result of the costs arising from the Budget. On top of this, retailers are still burdened by an outdated business rates system. It is vital that the government’s reform of business rates doesn’t impose additional costs onto retailers. Reform must leave no shop paying more.” Sterling is weakening a little, after UK inflation fell by more than expected this morning. The pound has lost nearly a third of a cent against the US dollar to $1.2915. Kathleen Brooks, research director at XTB, says: The market reaction to this data has been minimal, as the focus remains on the Spring Statement later today. The pound has dropped slightly, but GBP/USD is down less than 20 pips so far on Wednesday, the bond markets are not open, but we think that UK Gilts will also have a mild reaction to this data. Here’s a chart showing the various price changes that pulled UK inflation down to 2.8% last month. Core inflation has also slowed in February, despite prices rising steadily in the services sector. Core CPI (which excludes energy, food, alcohol and tobacco) rose by 3.5% in the 12 months to February 2025, down from 3.7% in the 12 months to January. The CPI goods annual rate slowed from 1.0% to 0.8%, while the CPI services annual rate was unchanged at 5.0%. Yael Selfin, chief economist at KPMG UK, says the UK’s central bankers will be cheered by the drop in core CPI: “The Bank of England will be reassured by today’s fall in underlying inflation, with core inflation easing. We expect underlying inflationary pressures to fall further over the coming months. That will hopefully allow the MPC to look through the expected near-term increase in headline inflation and resume cutting interest rates in the upcoming May meeting. “Goods inflation fell to 0.8% in February, however ongoing trade frictions could push prices higher. With the potential imposition of tariffs, the cost of imported goods could increase, creating additional cost pressures for both businesses and households. “Headline inflation eased to 2.8%, driven by a fall in the price of clothing. We expect headline inflation to rise over the coming months, driven by higher energy prices as well as a further increase in food prices.” ONS chief economist Grant Fitzner reports that alcoholic drinks prices have risen: “Inflation eased in February. Clothing prices, particularly for women’s clothes, was the biggest driver for this month’s fall. “This was only partially offset by small increases, for example, from alcoholic drinks.” Today’s UK inflation report shows that prices of alcohol and tobacco rose by 5.7% in the year to February, up from 4.9% in January. Cheaper clothing pulled the UK’s inflation rate down last month. Overall prices for clothing and footwear fell by 0.6% in the 12 months to February 2025, compared with a rise of 1.8% in the 12 months to January February’s figure was the first negative annual rate since October 2021, due to more discounting by retailers as they tried to shift stock. The inflation report explains: The easing in the annual rate was mainly the result of a large downward effect from garments for women, with small downward effects coming from a range of women’s clothing items. There were additional small downward effects from children’s clothing, and other clothing and clothing accessories, such as hats and women’s scarves. Newsflash: UK inflation has fallen back to 2.8%, in a boost to Rachel Reeves a few hours before she delivers her spring statement. The Office for National Statistics said annual inflation as measured by the consumer prices index cooled last month, dropping from 3% in January. That slightly lowers the cost of living pressure on families, but also means prices are still rising faster than the Bank of England’s 2% target. On a monthly basis, CPI rose by 0.4% in February 2025, compared with a rise of 0.6% in February 2024. The largest downward contribution came from clothing, the ONS reports. The Prospect union are urging the government to make sure the new funds for defence are spent in the UK, rather than on overseas weapons makers. Mike Clancy, General Secretary of Prospect, says: “The need to invest in defence becomes more obvious by the day, and this new money is an important down payment on this national priority. “New investment in the sector must go towards creating good, well-paid jobs in the UK’s world leading defence industry and not sending work abroad as has happened too often in the past. “Government must also go further in investing in skilled staff in the MOD in areas like procurement, to guarantee we have the expertise at the heart of government to ensure that extra money is spent well in the national interest.” You can get up to speed on the tricky economic picture facing the chancellor here: Rachel Reeves’s spring statement plans have suffered a last-minute shock. Britain’s fiscal watchdog, the Office for Budget Responsibility, has rejected the government’s estimate of savings from the changes announced last week, which will force the chancellor to make additional welfare cuts today to keep within her fiscal rules. Final estimates from the OBR suggested the changes announced by Liz Kendall, the work and pensions secretary, which included tightening the criteria for the personal independence payment (Pip), would not save the £5bn needed to keep within Reeves’s self-imposed borrowing limits. The chancellor is expected to announce an additional £500m in benefits cuts to make up part of the £1.6bn shortfall, first reported by the Times – with the rest of the gap filled by spending cuts elsewhere. Here’s the full story: According to Sky News, Reeves is now expected to announce that universal credit (UC) incapacity benefits for new claimants, which were halved under the original plan, will also be frozen until 2030 rather than rising in line with inflation. There will also be a small reduction in the basic rate of UC in 2029, with the new measures expected to raise £500m, they add. Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy. It’s a red letter day in the City of London, as investors await the latest UK inflation report, and then an update on the nation’s finances. On inflation, due at 7am, economists expect a small slowdown in the rising cost of living. The Consumer Prices Index is forecast to have risen by 2.9% in the year to February, down slightly on January’s 3%. That would still show prices rising faster than the Bank of England’s 2% target but would at least be a move in the right direction for strugging households. However, any relief may be short-lived, with many bills set to rise in April. The BoE predicts inflation will hit 3.75% this autumn. Economist Robert Wood and Elliott Jordan-Doak of Pantheon Macroeconomics predict: “February should be the calm before the storm of annual price resets, as Government-set price hikes and tax rises drive up headline CPI inflation to 3.5% in April. A drop in inflation would be welcome news for Chancellor Rachel Reeves, as she prepares to deliver her spring statement. This was initially intended to be a low-key update, but Reeves is now expected to announce spending cuts for some Government departments, and cuts to sickness and disability benefits which will be very unpopular with Labour MPs. Reeves is in a bind because government borrowing is running ahead of estimates, while growth has been disappointing. The Office for Budget Responsibility is expected to lower its growth forecasts, and could halve its growth projection for 2025 from 2% to near 1%. The rise in UK government borrowing costs since last October’s budget has also eaten into the chancellor’s limited headroom to keep within her debt limits. Reeves is expected to promise “security and national renewal”, alongside familiar pledges to kickstart economic growth and protect working people. She’ll also announce a further £2.2bn funding increase for defence from April, to keep the country safe. Reeves is expected to say she is proud of what has been delivered in the nine months since the general election: “Restoring stability to our public finances; giving the Bank of England the foundation to cut interest rates three times since the General Election; rebuilding our public services with record investment in our NHS and bringing down waiting lists for 5 months in a row; and increasing the National Living Wage to give 3 million people a pay rise from next week. The agenda 7am GMT: UK inflation report for February 9.30am GMT: UK house prices and rents report 12.30pm GMT: Rachel Reeves delivers the spring statement 1pm GMT (approx): Office for Budget Responsibility publishes its latest economic and fiscal outlook
Author: Graeme Wearden