Inflation edged down in February to the lowest level in over a year, keeping hopes alive that the severe squeeze on household’s finances will ease at a time when the Government has little room to boost the fragile economy.
Falling inflation is seen as crucial to help consumers to increase real spending and to keep the recovery on track, as the economy appears to have avoided a new recession.
However, the drop in the inflation rate to a 15-month low of 3.4 per cent from 3.6 per cent in January was slightly smaller than economists had forecast, highlighting the risk that price pressures will not fade as quickly as the Bank of England and the Government hope.
The slow decline in inflation reinforced expectations that the Bank of England will not favour further asset purchases once the current programme ends in May.
A raft of more upbeat news from the economy has dampened the need for futher stimulus and a survey showed this week that manufacturers are planning to increase production.
The Office for National Statistics said a drop in prices for electricity, gas, recreation and culture pushed overall inflation down, while a record rise in prices of alcoholic beverages contributed most to the increase in costs of living.
Economists had forecast inflation of 3.3 per cent, extending a drop from September’s three-year peak of 5.2 per cent.
“The recent rise in oil prices didn’t stop UK inflation from taking another step down in February, although progress has slowed a bit,” said Capital Economics analyst Vicky Redwood.
Inflation may even pick up again briefly due to higher petrol prices and the risk of rising food costs. “However, these factors should just slow the speed at which inflation falls, rather than preventing it from dropping at all,” she said.
In a sign that underlying pressures are fading, core inflation – which strips out components such as food and energy – fell to 2.4 per cent, the lowest since November 2009.
Consumers cut back spending sharply as price rises outpaced meagre growth in wages and the Government’s tax increases and spending cuts are also hurting household budgets.
The Bank of England forecasts that consumption should pick up later this year as it predicts inflation to fall below its two per cent target by the end of 2012.