THE UK Government’s economic strategy received a huge boost as inflation fell to a four-year low of 1.7 per cent, marking the second month in a row where it has fallen below the target of two per cent.
The fall in the consumer price index (CPI) rate was attributed to lower petrol prices and a squeeze on wages. It comes a week after unemployment in the UK dropped by 63,000, underpinning Chancellor George Osborne’s claims in last Wednesday’s Budget that his strategy is working.
Crucially, the fall in inflation supports expectations that wage growth will start to outstrip the cost of living in the coming months, reversing “the cost of living crisis” which Labour has made the key issue for the 2015 general election.
However, with inflation at the target level there is increasing expectation that interest rates could be raised earlier than expected, which could hit the cost of mortgages and other borrowing.
Coalition welcomes numbers
The figures were welcomed by Tory and Lib Dem coalition ministers.
Prime Minister David Cameron tweeted: “It’s good to see inflation falling again. Our long term economic plan is helping provide stability and security for hard-working people.”
Danny Alexander, Lib Dem Chief Secretary to the Treasury, said: “Today’s inflation numbers add to the growing tide of encouraging economic statistics over recent months.
“There is much more to be done and there are more difficult decisions ahead, but this shows that our long-term plan to repair the British economy is working.
“Falling inflation eases the pressure on family budgets and strengthens the economy.”
Rates ‘likely to stay put’
Howard Archer, chief UK and European economist at IHS Global Insight, said the fall in inflation would allow the Bank of England to hold interest rates down to support the economic recovery.
He said rates were likely to stay at 0.5 per cent until early next year despite the improved growth in the economy, with the Bank not taking sustained recovery for granted.
Samuel Tombs of Capital Economics said inflation was likely to fall even further.
“In our view, a favourable combination of lower import prices, flat commodity prices and recovering productivity is likely to help CPI inflation fall further, perhaps to about 1 per cent by the end of the year.”
Wages up, costs rising slower
The fall in inflation to 1.7 per cent was widely expected by economists.
It suggests private sector pay growth - which was also 1.7 per cent in the three months to January - has already caught up with rising costs.
However, total wages are only rising by 1.4 per cent, with ordinary public sector workers seeing a rise of just 0.9 per cent, according to the latest figures.
Earnings have not increased at a higher rate than inflation since a brief spike in March and April 2010 and have not consistently been improving since 2008.
The latest inflation figure was partly driven by a fall in petrol prices of 0.8p per litre between January and February this year, compared with a 4p rise for the same period in 2013.
Diesel was also down by 0.8p, compared with a 3.7p increase the year before, the Office of National Statistics said.
Meanwhile, energy bills saw a combination of prices and cuts, compared with an overall rise for the same period in 2013.
The price of men’s and women’s outerwear also rose by less than last year.
In contrast, large furniture became more expensive and books were 6.6 per cent dearer on the year. There was also upward pressure on inflation from tablet computers and printers.
Meanwhile, inflation in food and non-alcoholic drinks fell to a near four-year low of 1.8 per cent, the lowest since May 2010. It was last lower in February 2010.
A separate measure of inflation, the Retail Prices Index, which includes housing costs, fell to 2.7 per cent in February from 2.8 per cent in January.
A new measure of inflation, CPIH, which also includes housing costs, fell to 1.6%, down from 1.8 per cent in January, and the RPIJ measure fell to 2 per cent from 2.1 per cent.