UK inflation rate falls to 3.4% in February

Darren Morgan, ONS: "Largest downward pressures came from domestic heating costs"

Inflation in the UK continued to fall in February, thanks largely to lower gas and electricity bills.

Consumer Prices Index (CPI) inflation fell to 3.4% in February, down from 3.6% in January, according to the Office for National Statistics (ONS).

Retail Prices Index (RPI) inflation - including mortgage interest payments - fell to 3.7% from 3.9%.

Inflation has been falling steadily since September and the CPI rate is now at its lowest since November 2010.

Analysis

Inflation has fallen, but there is still a squeeze on household budgets - that's the message which has emerged from official data over the last week.

The labour market figures revealed that average earnings growth had slowed to just 1.4% annually, down from 1.9%. So although today's inflation figures revealed another fall in inflation on the CPI measure, from 3.6% to 3.4%, families may not have noticed much easing of the pressure on their spending power.

Lower heating and electricity bills helped pull down the annual inflation rate, after contributing to the surge last year. But the threat of higher oil and petrol prices hangs over the economy and could yet knock off course the official predictions of rapid falls in inflation later this year.

The Bank of England's target for inflation - the rate at which prices are rising - is 2% on the CPI measure.

The ONS said that average gas and electricity bills fell during February this year, whereas they rose during the same month a year ago.

All of the six big energy companies have announced price cuts and most reductions had come into effect by the end of February.

Discounting on digital cameras and cheaper air fares also pulled the CPI rate down.

However, higher alcohol prices stopped a further decline.

'Stickier than hoped'

Analysts had expected a steeper fall in the headline CPI rate, to about 3.3%.

"The Bank of England is hoping that it's going to fall to 2% by the end of the year," Chris Williamson, chief economist at Markit, told the BBC.

"The fact it's been a little bit sticker than we hoped this month really casts further doubt on the Bank's projection.

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Inflation is now undermining the living standards of most people in the UK”

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"So this might be another case of the Bank being a little bit too optimistic of where inflation's going to go."

Others were less concerned.

"We thought the risks were that it would be a bit above the consensus, but in the scheme of things it's pretty much in line," said Ross Walker, RBS economist.

Prioritising growth

Chancellor George Osborne will set out his third Budget on Wednesday, and has pledged to help low and middle earners.

Ross Smith: "If mortgage rates go up, then we'll really start to struggle"

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.

But the British Chambers of Commerce warned that the UK was unlikely to see prolonged periods of below-target inflation, given the "worrying" increases in world oil and food prices since the beginning of the year.

"Given the challenges facing the economy, it is imperative that in his Budget the chancellor demonstrates his commitment to placing economic growth at the top of the policy agenda," said David Kern, chief economist at the BCC.

While the latest ONS data may be welcomed by households, the TUC warned there was still a big gap between what people are taking home and the prices greeting them on the High Street.

Details from inflation calculator

Figures from the financial information service Moneyfacts also suggest that it is still a tough market for savers.

According to Moneyfacts, to beat inflation, a basic rate taxpayer at 20% needs to find a savings account paying 4.25% per annum, while a higher rate taxpayer at 40% needs to find an account paying at least 5.66%.

"It's just a bit too early for everyone to burst into a chorus of 'don't worry, be happy' as today's figures still mean that there are only 79 accounts out of 1,126 that negate both inflation and the taxman's cut," said Sylvia Waycot from Moneyfacts.

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