UK inflation came in lower than expected in February, following a 10-month peak in January, raising morale before Chancellor Rachel Reeves’ Spring Statement, due later on Wednesday.
UK prices rose by 2.8% year-on-year, following a 3% reading in January, mainly driven down by costs sliding 0.6% for clothing and footwear.
“Retailers are intensifying their focus on affordability in their shopper communications, responding to mounting inflationary pressures with increased discounting, price matching, and promotions on private brands,” Pieter Reynders, Partner at McKinsey & Company, commented.
In a monthly comparison, prices rose by 0.4% in February, following a 0.6% increase in the previous month.
The cost of food and alcoholic beverages jumped by 3.3% compared to last year.
The core consumer price index, calculated without food and energy prices, rose by 3.5% in the 12 months to February 2025, down from 3.7%.
“Like an over-refreshed pub-goer after midnight, inflation has staggered uncertainly in a new direction again, falling from 3% to 2.8%. It’s not a major shift, but it’s not what markets were expecting,” commented Sarah Coles, head of personal finance at Hargreaves Lansdown.
Coles expects inflation to lift again next month and then keep rising in April, when the energy price cap is forecast to go up to its highest level since the beginning of last year.
“This is on top of rises in everything from water bills – up £123 on average - to council tax – up an average of £109. The Bank of England is expecting inflation to peak at 3.7% later this year," she said.
Lindsay James, investment strategist at Quilter, added: “There is a cocktail of risks right now for the UK when it comes to inflation, and this is only adding to the ‘stagflationary’ fears.”
“Economic growth is miniscule and risks going backwards, but should inflation continue to refuse to get back near the 2% target, it is difficult to see what the Bank of England can do with interest rates.”
Stagflation is one of the deadlocks for central banks, when not cutting the benchmark rate may push the economy into recession but cutting could drive up inflation.
Services inflation is currently fuelling these headaches in the UK, as it remains elevated. The annual rate was unchanged at 5.0% in February, and it is expected to be pushed up by a rise in employer NI contributions, along with higher minimum wage thresholds.
“The BoE really needs to see services CPI recede heavily if it’s going to feel more confident reducing rates in the back half of the year,” Robinhood lead analyst Dan Lane said.
To cut or not to cut: What is expected from the Bank of England?
Though inflation is still higher than the Bank of England's 2% target, hopes are high that easing price pressures will lead to bigger interest rate reductions than predicted, which could boost the UK’s staggering economy.
Last week, the bank kept its main interest rate unchanged at 4.50% even though the economy is barely growing. One risk for both growth and inflation is that the nation faces the uncertainty of tariff policies being enacted by the Trump administration in the US.
Coles believes that the current reading eases the pressure slightly on the Bank of England, but not enough to change the current path. While being cautious, “the Bank won’t want to keep rates too high for so long that growth stagnates entirely. On balance, we’re expecting a rate cut in May or June, and a second around September,” she said.
David Morrison, senior market analyst at FCA-regulated fintech and financial services provider, Trade Nation, commented: "There was an instant market reaction. Sterling fell against both the US dollar and the euro, while futures on the FTSE 100 stock index shot up.”
