Inflation went down last month, edging closer to the government’s 2% target. What does this mean for interest rates?

Consumer prices index (CPI) inflation fell to 3.4% in February, down from 4% in January – the lowest level in two and a half years. CPI inflation is the main measure of inflation and relates to a basket of goods and services purchased by the average household.

The cost of living is rising at its slowest pace since September 2021. Inflation was 4% in the year to January but is now edging closer to the Bank of England’s target figure of 2%.

James Smith, research director at the Resolution Foundation, described it as the ‘fastest fall in inflation for almost half a century’ and said it would be welcome news for households.

Services inflation (which considers service-related categories like education and hospitality) fell to 6.1%, its lowest level in over a year.

Food prices and restaurants have seen the biggest slowdown, but mortgage rates have not eased lately. The website Moneyfacts says that the average rate of a two-year fixed-rate mortgage was 5.8%, up slightly from 5.5% in January.

Predicted inflation drop

Most economists predicted the inflation drop. Chancellor Jeremy Hunt said, ‘As inflation gets closer to its target, that opens the door for the Bank of England to consider bringing down interest rates. That brings down mortgage rates, which makes a very big difference. It’s far too early to know whether we’ll have another fiscal event before the election, but the difficult decisions the government has taken over the past year are paying off.’

Inflation peaked at 11.1% in October 2022. Last year, the government said it would halve inflation and there are predictions for it to hit its target of 2% in April. The recent reductions in energy bills following the cut in Ofgem’s energy price cap should help with this target.

Forthcoming base rate review

The Bank of England’s Monetary Policy Committee will review the base rate on Thursday, 21 March. Economists generally believe the rate will remain at 5.25% for the time being. Many economists predict a base rate reduction in the summer.

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