By Ed Frankl
The U.K.'s annual rate of inflation fell to its lowest level since September 2021 in February, and is on course to hit the Bank of England's target over the coming months as home energy prices are set for another large drop.
Consumer prices rose 3.4% in February compared with the same month of 2023, a slowdown from 4.0% in January, data from the Office for National Statistics showed Wednesday. It was also slightly cooler than expected, with economists expecting inflation to fall to 3.5%, according to a poll by The Wall Street Journal.
As in much of Europe, energy and food prices surged following Russia's invasion of Ukraine in early 2022, and the annual rate of inflation peaked at 11% in October of that year.
But energy prices have fallen sharply over the past year, and the U.K.'s energy regulator has announced a further 12% drop from April. Most economists expect the annual rate of inflation to be around 2% in that month, in line with the Bank of England's target.
"Last summer, investors thought the U.K.'s inflation problem was uniquely bad," ING economist James Smith wrote in a note ahead of the release. "Fast forward to today and headline inflation will soon be below target."
That would mark a dramatic turn in fortunes for a country that once seemed to suffer from an exceptionally high inflation rate.
Six months ago, U.K. inflation was 6.7%. By contrast, U.S. inflation fell to 3.2% from 3.7% over the same period.
Indeed, inflation in the U.K. may be comfortably below inflation in the U.S. and eurozone by April, according to Paul Dales, chief U.K. economist at Capital Economics.
"That may prompt the BOE to starting cutting interest rates in the summer--perhaps in June--and inflation of 1% may force it to reduce rates to 3.0% next year rather than to 4.0% as expected by investors," he said.
However, the BOE is expected to leave its key interest rate unchanged on Thursday, even though the U.K.'s economy contracted in the second half of last year.
Policymakers worry that the decline in the inflation rate to their target will prove temporary, since prices of services continue to rise at a rapid pace, driven by still-high wage growth.
Annual services inflation was 6.1% in February, considerably higher than goods inflation at 1.1%. Food inflation, which plagued British consumers for much of the past two years, also fell further, to 5.0% from 7.0% in January.
Meanwhile, core inflation, which strips out volatile changes in energy and food prices, remained higher than the headline rate, at 4.5%, from 5.1% in the prior month, albeit little lower than consensus expectations of 4.6%.
Regardless, the central bank is still expected to cut rates later this year, with money markets pricing in a first cut at the start of August shortly after the inflation print.
Write to Ed Frankl at edward.frankl@wsj.com
(END) Dow Jones Newswires
03-20-24 0407ET
