Inflation falls at fastest rate in 50 years, putting Bank of England's 2% target within reach

The latest headline annual rate Inflation fell at its fastest rate in 50 years, hitting 3.4% for February, down from 4% for the month before.

It was a narrowly bigger drop than the reading of 3.5% expected. And it was also the the first fall since November after inflation unexpectedly rose in December and stayed  steady in January.

Today’s number is the lowest level in two years. The drop was the fastest 12-month fall in inflation since 1978 according to the Resolution Foundation.

And it was led by a decline in the rate of food inflation, which hit 5%, down from 6.5%, the eleventh consecutive monthly fall.

The set-piece data out this morning from the Office for National Statistics, was the last major release before tomorrow’s decision on interest rates due from the Bank of England at midday. Policymakers, who have a 2% target for the consumer price index, will be scrutinising it.

The next move on the official base cost of borrowing in the UK is expected to be a cut, with interest rates at a 16-year peak of 5.25% since last August. Expectations on the timing  when the cuts will kick in action have moved further back, to June or August, meaning rates will have been up there for almost a year.  

There is little chance of the first cut from the peak this week. The BOE has indicated that it expects the interest rate to stay higher for longer to make sure that the fight against inflation is secures after soaring energy costs after Vladimir Putin’s invasion of Ukraine sparked the cost-of-living crisis via double digit inflation which peaked over 11% in October 2022.

City experts at ING predicted that the headline consumer price index inflation will “be below 2% from May and for much of 2024”.

James Smith, developed markets economist at the Dutch bank added: “A lot of this can be explained by food inflation, which is falling rapidly. On a month-on-month basis, producer prices for food have either been flat or slightly negative for a while now and that’s feeding through to consumers very noticeably.

“The annual rate of food inflation ... could be below 1% by June.”

Alice Haine, at Bestinvest by Evelyn Partners, the wealth manager, said: “Naturally, most households would welcome an interest rate cut tomorrow, but with the first rate cut not expected until the summer, all eyes are pinned on what the central bank has to say tomorrow to see if there are any hints of earlier action,” adding:

“For now, however, the BoE is likely to want more consistent evidence that inflationary pressures really are easing before it initiates an interest rate cut. This means borrowing costs could remain higher for longer – not the news households will want to hear as they struggle to balance their budgets after a challenging couple of years.“

 In recent weeks, the cost of mortgages on offer to home buyers have ticked back up as City forecasts for the timing of cuts from the monetary policy committee have moved back. So-called “swap rates” in the wholesale financial markets, which directly affect the cost of home loans on offer to borrowers, have been inching back up and typical 5-year fixed mortgages have crossed back above 5%.

City markets put the chances of a rate cut this week at only 3%.  Traders are also betting that the first rate cut will be in the summer, either in June or August.