Inflation rate falls but high oil prices cast a shadow

The consumer prices index (CPI) rate of inflation dipped to 3.4 per cent, compared to 3.6 per cent in January, the Office for National Statistics (ONS) said, as energy bill cuts were passed on to hard-pressed families.

However, economists warned that the Bank of England’s expectations that inflation will fall to the Government’s two per cent target by early 2013 could be “optimistic” as resurgent oil costs slow further declines.

Chris Williamson, chief economist at financial services information firm Markit, said oil prices would present the “biggest headache” in the months ahead, and the Bank’s forecasts may prove “optimistic”.

He said: “Stickier than anticipated inflation will be bad news for consumer spending and the economic recovery in general.”

The average price of petrol rose in February by 1.9p a litre to 135.1p, while diesel rose 1.4p to hit a record high of 143p a litre, but the ONS said this had a negligible effect on the overall rate of inflation.

The cost of Brent crude – an oil trading benchmark – in London has risen by nearly 25 per cent since the start of the year to around $125 a barrel as tensions in Iran and Syria escalate.

The surge in the price reportedly prompted President Barack Obama and Prime Minister David Cameron to discuss releasing strategic oil reserves to curb further rises.

The greatest downward pressure on the CPI rate came from domestic electricity and gas bills, which fell 1.3 per cent and 0.9 per cent respectively.

Scottish Power reduced gas tariffs by an average five per cent for around 1.4 million domestic gas customers last month, after E.ON announced a six per cent fall in electricity bills, benefiting 3.7 million customers.

But there was also a drop in the cost of recreation and culture, driven by cheaper digital cameras, pet-related products and books, newspapers and stationery.

Air fares fell by 1.6 per cent, compared to a 2.1 per cent rise a year ago, caused by cheaper European tickets, the ONS said.

February’s drop in inflation will have provided some relief to households who were squeezed by high prices and sluggish wage growth throughout 2011, although unions warned conditions were still challenging for most families.

TUC general secretary Brendan Barber said: “With 2.7 million people out of work and those with jobs feeling the squeeze on family budgets, it will be some time before we see strong and sustainable consumer spending again.”

Alcohol prices rose 2.6 per cent, a record rise for a January-to-February period, but the ONS said this was a particularly volatile category and offered no specific reason for the rise.