UK inflation slows more than expected in February

British annual consumer price inflation slowed last month for the first time since September, dropping more than expected after favourable base effects and a fall in the prices of games and toys, data showed on Tuesday. The Office for National Statistics said consumer price inflation slowed to 3.0 percent last month from January's 14-month high of 3.5 percent. Analysts had expected the annual rate to ease to 3.1 percent.
The figures will fuel hopes that inflation has peaked and will drop back below the Bank of England's 2 percent target by the end of the year. "It's the second month in a row that it's undershot the consensus," said Peter Dixon, economist at Commerzbank. "It tells us that we can be pretty confident that the Bank of England's view that inflation will fall sharply this year is on track."
The June gilt future rallied more than 20 ticks to a contract high as the data reinforced expectations that the central bank would not need to tighten policy before much later this year.
"Frankly interest rates are not going to be an issue for at least another six months, and it's a fifty-fifty call whether the BoE does anything before the end of this year," Dixon said. The central bank has insisted that the recent spike in inflation will be transitory, as it was caused by base effects relating to 2008's sharp oil price falls and a temporary cut in value-added tax dropping out of the year-on-year comparison. Weak growth and high unemployment limit the ability of firms and workers to raise prices and wages.
Core inflation, which strips out volatile items such as energy and food prices, eased to 2.9 percent in February from 3.1 percent. On the month, consumer price inflation rose 0.4 percent, versus a 0.2 percent fall in January. This was a smaller rise than in February 2009, when prices rebounded by a record 0.9 percent after heavier seasonal discounting in the January sales.
The ONS said recreation and culture made the biggest contribution to the fall in the annual CPI rate, knocking 0.17 percentage points off the rate, followed by housing and household services which took off 0.10 percentage points. Clothing and footwear added 0.08 percentage points to the annual rate. The broader retail price inflation gauge held steady at 3.7 percent, in line with forecasts.