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UK inflation dips to 2.8% in February but pressure on interest rates remains

by March 26, 2025
March 26, 2025
UK inflation dips to 2.8% in February but pressure on interest rates remains

Inflation in the UK eased more than expected in February, falling to 2.8 per cent from 3 per cent in January, according to official data released ahead of today’s spring statement.

The drop offers some temporary relief to policymakers, but underlying pressures and energy price risks mean interest rate cuts are still likely to be slow and measured.

The latest figures from the Office for National Statistics show that consumer price inflation came in below City expectations of 2.9 per cent and matched the Bank of England’s forecast. Despite this softer reading, inflation is still expected to rise again later this year, with projections of a peak around 3.7 per cent, driven largely by higher energy and utility costs.

Core inflation, which strips out volatile items such as food and energy, also showed signs of easing. It dipped from 3.7 per cent to 3.5 per cent, bucking forecasts of a small increase. However, inflation in the services sector — a key measure of domestic cost pressures — remained stubbornly high at 5 per cent.

The ONS said the February fall was led by the steepest drop in clothing prices for four years. Women’s fashion, accessories such as hats and scarves, and children’s clothing all contributed to the fall in inflation, with overall clothing and footwear prices down 0.6 per cent year-on-year — the first decline since October 2021. Inflation for housing costs, including rents, also moderated, alongside lower prices for live event admissions.

On the other hand, alcohol and tobacco inflation surged from 4.9 per cent to 5.7 per cent, reflecting duty increases implemented at the beginning of the month.

The figures come as Chancellor Rachel Reeves prepares to deliver her first spring statement, with rising inflation and persistently high interest rates complicating the outlook for public finances. Both factors increase the government’s debt servicing costs and push up spending on benefits and pensions that are linked to inflation.

The Bank of England, which has already lowered interest rates from 5.25 per cent to 4.5 per cent since last year, is expected to proceed cautiously. Markets are pricing in just one or two additional cuts this year, as policymakers weigh the risk of second-round effects — where inflation drives wage growth, which in turn fuels further price rises.

Annual inflation now stands at 2.3 per cent in the eurozone and matches the 2.8 per cent reading in the United States, suggesting the UK remains broadly aligned with international trends.

However, economists remain cautious about interpreting February’s fall as a sign of lasting relief. Paul Dales, chief UK economist at Capital Economics, warned: “The dip in CPI inflation is a bit of a red herring as inflation will probably be back above 3 per cent in April and around 3.5 per cent by September.”

Yael Selfin, chief economist at KPMG, struck a more optimistic tone, saying: “The Bank of England will be reassured by today’s fall in underlying inflation, with core inflation easing. We expect underlying inflationary pressures to fall further over the coming months. That will hopefully allow the MPC to look through the expected near-term increase in headline inflation and resume cutting interest rates in the upcoming May meeting.”

With inflation softening but still set to rise again in the coming months, the Bank is expected to hold its nerve — and businesses will be watching closely as the government sets out its economic strategy for the rest of the year.

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UK inflation dips to 2.8% in February but pressure on interest rates remains

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