Inflation drops to lowest level in two and a half years paving way for interest rate cuts this summer

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Chancellor Jeremy Hunt is interviewed by GB News, at No 11 Downing Street. Picture by Kirsty O'Connor/HM Treasury. CC BY-NC-ND 2.0 DEED

Inflation has seen a significant decrease, reaching its lowest level in nearly two and a half years, potentially paving the way for interest rate cuts this summer.

According to data from the Office for National Statistics (ONS), the consumer price index (CPI) rose by 3.4 percent in the year to February, down from 4 percent in January. This drop exceeds analysts’ expectations, marking the first time inflation has fallen to this level since September 2021.

The decline in inflation is attributed to stagnant food prices compared to a notable increase the previous year. On an annual basis, food and drink prices rose by 5 percent, down from 7 percent in January and the lowest rate since January 2022.

Grant Fitzner, the ONS’s chief economist, noted that price increases at restaurants and cafes also slowed down, with costs easing across various goods and services.

The figures were released just ahead of the Bank of England’s expected decision to keep interest rates unchanged in an effort to steer inflation back to its 2 percent target. However, some economists believe that the Bank has delayed rate cuts for too long, with expectations of a significant reversal in the coming months.

Core inflation fell faster than anticipated to 4.5 percent from 5.1 percent in January, while services inflation, closely monitored by the Bank, eased to 6.1 percent from 6.5 percent.

Suren Thiru, economics director at ICAEW, found the figures encouraging, suggesting that they may lead to a more dovish stance among policymakers and pave the way for rate cuts in the summer.

Jeremy Hunt, the Chancellor, hailed the decrease in inflation as evidence that the government’s plan is effective. He emphasised the forecasted return of inflation to the 2 percent target in the coming months, suggesting potential economic improvements and progress toward growth initiatives.

The Chancellor said: 

“Inflation has not just fallen decisively but is forecast to hit the 2pc target within months. 

“This sets the scene for better economic conditions which could allow further progress on our ambition to boost growth and make work pay, by bringing down national insurance as we work towards abolishing the double tax on work – but only if we can do so without increasing borrowing or cutting funding for public services.”

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