Inflation hits 15-month low but fuel rises set to drive it back up again

HIGH petrol prices and rising food costs could see inflation begin to rise this month after official figures showed it had fallen to its lowest level for more than a year, economic analysts have warned.

Figures released by the Office of National Statistics (ONS) yesterday showed the most commonly used measure of inflation – the Consumer Prices Index – dropped to 3.4 per cent in February, down from 3.6 per cent in January.

Retail Prices Index (RPI) inflation, the measure that includes mortgage interest payments, fell to 3.7 per cent from 3.9 per cent.

The ONS statistics continue a trend that has seen inflation fall steadily since September, and the CPI rate is now at its lowest since November 2010.

Despite yesterday’s drop, – which was largely a result of lower electricity and gas bills – the rate is still above the Bank of England’s target for inflation, 2 per cent on the CPI measure.

Vicky Redwood, an analyst with Capital Economics, predicted that inflation could begin to rise this month.

She said: “The downward trend in the headline rate is likely to pause over the next couple of months. Indeed, inflation could even rise in March on the back of the continued rise in petrol prices.”

She added: “However, these factors should just slow the speed at which inflation falls, rather than preventing it from dropping at all.”

Explaining yesterday’s figures, the ONS said a drop in prices for electricity, gas, recreation and culture pushed down overall inflation – the rate at which prices increase.

A record rise in price 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.

Published the day before the Chancellor George Osborne presents his Budget, yesterday’s fall will keep hopes alive that the severe squeeze on Britons’ finances will ease at a time when the government has little room to boost the fragile economy.

Mr Osborne has indicated that he intends to provide some relief for low and middle earners while keeping up his austerity drive to erase Britain’s huge budget deficit.

The easing rate of inflation will be welcomed by households that were squeezed by high prices and sluggish wage growth throughout 2011 and seemed to support the Bank of England’s decision to pump an extra £50 billion into its quantitative easing programme last month.

Bank Governor Sir Mervyn King and his colleagues have forecast the rate of inflation to finally dip below the 2 per cent target early next year.

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.

ScottishPower reduced gas tariffs by an average of 5 per cent for about 1.4 million domestic gas customers last month, after E.ON announced a 6 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 with a 2.1 per cent rise a year ago, driven by cheaper European tickets, the ONS said.

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 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.

Easing inflation is seen as crucial to the UK’s economic recovery.

It is hoped that it will help cash-strapped consumers, who have been hit by high prices and low wage growth, increase their spending and thereby boost the economy.