Inflation dips for first time in five months

The headline rate of inflation slowed in February for the first time since September, raising hopes that inflation has now peaked.

Utility price cuts and a slower rise in food prices helped to send the Consumer Prices Index (CPI) back down to three per cent in February, official data published yesterday revealed.

In January, it soared to a 14-month high of 3.5 per cent – well above the Bank of England’s two per cent medium-term target.

Economists said last month’s larger-than-expected fall confirms that underlying prices in the UK economy remain fairly subdued.

Opinion is divided over whether inflation will stay steady or rise in the short term, but economists universally believe it will fall back sharply later this year.

Jonathan Loynes, chief European economist at Capital Economics, says there is nothing in the figures to suggest that the Monetary Policy Committee needs to think about tightening policy.

“Looking ahead, inflation may stay close to current levels over the next few months, perhaps triggering another letter from Mervyn King to the chancellor. But it should fall back sharply later this year and in 2011 as the vast amount of spare capacity in the economy keeps core price pressures subdued,” he said.

Howard Archer, chief UK and European economist at IHS Global Insight, believes CPI could rise further in the short term although it may be back under the Bank’s two per cent target by the end of the year.

“Given that oil prices bottomed out early in 2009 and then firmed, base effects will become more favourable. Meanwhile, underlying price pressures should be contained by substantial excess capacity, likely bumpy and gradual recovery, wage moderation amid high unemployment and job insecurity, and the need for retailers to price competitively,” he said.