UK inflation slowed to 3.4% in February

The latest Consumer Price Index (CPI) data takes us closer to the Bank of England’s 2% target. Is an interest rate cut on the horizon?

Shopping basket with groceries in supermarket.
(Image credit: Tara Moore)

The rate of UK inflation fell to 3.4% in the twelve months to February, driven by slowing food, restaurant and café costs. This is the lowest level since September 2021. 

That’s according to the latest CPI report, released by the Office for National Statistics (ONS) today. 

It is important to note that prices are still rising, just at a slower rate than they once were. Inflation peaked at 11.1% in October 2022, and has been easing steadily since.

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The drop in the rate of inflation does not come as a surprise – although Alice Haine, personal finance analyst at Bestinvest, notes that it did slow “more than expected”. 

The previous two CPI readings (covering December 2023 and January 2024) both came in at 4% and, in his Spring Budget on 6 March, Jeremy Hunt expressed optimism that prices would continue to slow further.

“Easing inflation will certainly be welcomed by households whose finances have been forced to absorb soaring price rises during the peak of the cost-of-living crisis”, says Haine.  

The Office for Budget Responsibility (OBR), which published its economic forecasts shortly after Hunt’s Budget, expects inflation to average out at 2.2% over 2024 as a whole.

Consumers and the Bank of England will be watching the data closely, but we will have to wait and see whether the OBR's forecast materialises. Here is the full list of CPI release dates in 2024. The next announcement will come out on 17 April. 

In the meantime, the Bank of England’s Monetary Policy Committee (MPC) will meet tomorrow (21 March) to review interest rates. It is expected to hold the UK base rate at its current level of 5.25%

Why is inflation slowing?

In its latest release, the ONS explains that “the easing in the annual inflation rates reflected downward contributions from nine divisions, partially offset by upward contributions from two”. 

“Large downward effects from food and non-alcoholic beverages, and restaurants and hotels were partially offset by a large upward effect from housing and household services”, it added.

Haine describes easing food inflation as “good news for household budgets”. It is now at 5%, down from 6.9% in January. This is “a big relief considering its peak above the 19% mark in March 2023”, she adds.

Another piece of good news is that core CPI (which excludes energy, food, alcohol and tobacco) was 4.5% in the twelve months to February, down from 5.1% in January. This measure strips out some of the most volatile items in the CPI basket.

It can take some time for price changes to work their way through a supply chain and into your wallet. This means that today’s lower inflation figure is the result of economic and monetary policy changes that took place a little while ago. 

First, let’s consider the causes of the inflation we are currently experiencing. First, there was the pandemic (March 2020) which, in turn, caused supply chain disruption (2021-2023). Then there was the outbreak of war in Ukraine (24 February 2022), which caused energy prices to spike. Inflation didn’t peak until some months later (October 2022).

Many of these issues have now improved significantly – and we are starting to see the effects of this in the data. 

Pandemic-related restrictions have been unwound and supply chains have normalised considerably. Although Russia continues to wage war in Ukraine, the inflationary pressures this is causing in the rest of Europe are starting to alleviate. We are past the worst of the energy crisis, for example, and the Ofgem energy price cap will fall by 12.3% from April

On top of this, interest rate hikes from the Bank of England are starting to take effect. The Bank increased rates fourteen times between December 2021 and August 2023 in an attempt to quash inflation. 

As a result, consumers and businesses have less money to spend. It is an expensive time to borrow, and any existing mortgages or debts are costing a lot more in interest payments. The laws of supply and demand mean that, when this happens, prices start to slow. 

What’s more, the labour market is now easing too. Wage growth has slowed in recent months as businesses make cutbacks to save costs. All of this is contributing to the slowdown in prices. 

The OBR is currently forecasting an average UK inflation rate of 2.2% for 2024, and 1.5% for 2025.

When will the Bank of England cut interest rates?

The next Bank of England MPC meeting will take place tomorrow, 21 March. The MPC is not expected to announce a rate cut, but experts are now forecasting that the first cut could come in June. 

The Bank will be watching the economic data closely and basing its decision on this. While today’s CPI data pushes us in the right direction, the Bank won’t want to make a decision that it ends up having to reverse.

What does this mean for savers and investors?

The good news for savers is that they can secure inflation-busting rates on their cash deposits. The most competitive savings accounts are currently offering rates north of 5%. 

However, with interest rates expected to fall over the coming months, you will need to act fast to bag the best deal. If you are able to lock your cash away for a longer period of time, you could consider putting your money in a one or two-year fixed rate account. That way, the interest you are earning won’t fall when the base rate is cut. 

Those with a mortgage will also be watching the Bank of England’s upcoming rate decisions closely. Mortgage rates have soared over the past couple of years, almost reaching 7% in August 2023. They have now fallen from this peak, but remain high. The average 2-year fixed residential mortgage is currently 5.80% and the average 5-year is 5.39%, according to the latest data from Moneyfacts. 

While slowing inflation is good news, Haine warns that consumers shouldn’t get ahead of themselves. “While households appear to have a little more financial breathing space, it is still wise to follow the BoE’s lead and keep a tight rein on your finances for now”, she says. 

What’s more, many will face above-inflation bill hikes this spring impacting their mobile and broadband costs, council tax, and water bills. 

“No one knows what is round the corner so, for now, spending should remain constrained and emergency funds topped up to ensure households survive any further financial surprises”, she adds. 

Katie Williams

Katie has a background in investment writing and is interested in everything to do with personal finance and financial news. 

Before joining MoneyWeek, she worked as a content writer at Invesco, a global asset management firm, which she joined as a graduate in 2019. While there, she enjoyed translating complex topics into “easy to understand” stories. 

She studied English at the University of Cambridge and loves reading, writing and going to the theatre.