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Welcome drop in inflation as Brexit impact fades

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20/03/2018
Inflation dropped by more than expected in February as the fall in sterling in the wake of the Referendum starting to fall out of the figures.

Prices were 2.7% higher than a year ago, according to data from the Office for National Statistics, down from 3% in January. Economists had been expecting a 2.8% rise.

The ONS said: “The largest downward contributions to the change in the rate came from transport and food prices, which rose by less than a year ago.” Falling prices for accommodation services also pushed prices lower, while rising prices for footwear produced the largest upward contribution.

This reduction in inflationary pressures may influence the Bank of England’s stance on interest rates, making it less likely it will push ahead with a widely-expected increase in interest rates at the MPC meeting in May. Nevertheless, data from Retirement Advantage showed that UK households will collectively need to find an extra £21.2bn a year to maintain their standard of living compared to 12 months ago- equivalent to £777.92 per household.

The annual change in the retail price index fell to 3.6% in February from 4% in January.

Kevin Doran, chief investment officer at AJ Bell, said: “While today’s numbers show a small moderation in price rises, they don’t detract from the fact that interest rates and yields on bonds continue to track significantly below the pace of inflation.

“It is clear that the war on savers that began in March 2009 with ultra-low interest rates and a monetary experiment in the form of Quantitative Easing, continues to offer up casualties.  Savers who have held their money in a UK bank account since then have seen their savings grow at a paltry 4% in total, which is dwarfed by the 30% increase in inflation over the same period.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, said investors should expect a significant change of course for the Bank of England: “In theory that relieves some of the pressure on the Bank of England to raise interest rates, though falling inflation is very much in their script, so these latest figures don’t really alter what we can expect from the Bank in the coming months.

“Inflation is still above target after all, and the Bank of England would love to build up some firepower to deploy in the event of an economic slowdown. Higher interest rates achieve that by providing greater scope for rates cuts, and hence monetary stimulus if needed. Responding to an economic slowdown doesn’t mean causing one however, so the Bank will proceed very cautiously with rate rises, lest it upset the applecart.”

Khalaf said that while falling inflation should go some way to alleviating the consumer squeeze, annual price rises are still high for essential items like electricity, food and transport.

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