Inflation in huge fall to 3.4% as food price rises ease – what it means for your money

By Staff

Inflation shows how the price of goods and services have changed over time and is closely watched by the Bank of England when it comes to interest rates

UK inflation fell to 3.4% in the 12 months to February, as food prices helped drive the rate down closer to the 2% target.

The latest figure is down from the 4% that was recorded in January and means inflation is at its lowest level in more than two years. It also comes ahead of its latest Bank of England interest rate decision on Thursday, where it is expected the rate will be held at 5.25%.

Consumer Prices Index (CPI) inflation is a measurement of the change in the prices paid for goods and services over time. Most economists had predicted inflation was going to fall. But despite the drop, it does not mean price rises have stopped. Prices for goods and services are still going up – they’re just rising at a slightly slower rate than before.

The largest downward trend came from the price of food, as well as restaurants and cafes. Prices for food and non-alcoholic beverages rose by 5% in February 2024, down from 6.9%. The February figure is the lowest annual rate since January 2022, and down from the high of 19.2% in March 2023.

However, this was partially offset by petrol prices and rental costs. The average price of petrol rose by 2.3p per litre to 142.2p per litre, while diesel prices rose by 3p per litre to 151.3p per litre. Core inflation, which looks at price rises excluding volatile categories such as food and energy, also fell from 5.1% to 4.5%.

Grant Fitzner, chief economist at the ONS, said: “Inflation eased in February to its lowest rate for nearly two-and-a-half years. Food prices were the main driver of the fall, with prices almost unchanged this year compared with a large rise last year, while restaurant and café price rises also slowed. These falls were only partially offset by price rises at the pump and a further increase in rental costs.”

Chancellor Jeremy Hunt said: “The plan is working. Inflation has not just fallen decisively but is forecast to hit the 2% target within months. This sets the scene for better economic conditions which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work – but only if we can do so without increasing borrowing or cutting funding for public services.”

Rachel Reeves MP, Labour Shadow Chancellor, said: “After fourteen years of chaos and uncertainty under the Conservatives working people are worse off. Prices are still high, the tax burden is the highest it has been in seventy years and mortgage payments are going up.

“Now Rishi Sunak is putting forward a reckless £46 billion unfunded tax plan to abolish National Insurance that would risk crashing the economy and re-running the disastrous Liz Truss experiment.“Britain cannot afford another five years of this failed Conservative government. It’s time for change and it’s time for Rishi Sunak to set the date for the election.”

What is inflation?

If something cost £1 last year and the price of that item now is £1.04, then the rate of inflation is 4%. The ONS releases inflation data every month and uses a “basket of goods” and services to measure price rises.

The “basket of goods” is regularly updated to reflect current trends, with vinyl records and air fryers added in 2024, and hand sanitiser taken out. But the main CPI figure you see in headlines is used to represent an average. This means the individual prices of some goods may be higher or lower than this.

What has inflation got to do with interest rates?

The Bank of England has to keep inflation under control and its main tool for doing this is through its base rate. The base rate influences the interest rate you’re offered by banks and lenders – so when it is higher, borrowing is more expensive.

But the idea of this, is that people will then spend less money – and when they spend less, this should bring demand and lower prices. The downside to putting up the base rate, is that mortgage payments have rocketed for millions of homeowners.

The base rate stood at just 0.1% in December 2021. It is now at 5.25% and has been held at that level for the last four Bank of England meetings. The next base rate decision is due tomorrow (March 21).

Why is inflation falling?

Inflation peaked at 11.1% in October 2022. It began to rise in 2021 largely due to higher costs of energy and food. Demand for energy increased after Covid and then this was exasperated by the Russian invasion of Ukraine.

The war also pushed up food prices, due to rising costs for fertilisers and animal feed. Both energy and food price rises have come down in recent months, although they are still higher than before.

Will inflation fall further?

The Bank of England expects inflation to drop to its 2% target between April and June. However, it then predicts inflation will rebound and increase again during the second half of the year, and could rise to 2.8% by the start of 2025.

The Bank of England will be looking to get inflation under control before it announces any rate cuts. At the moment, some analysts predict a rate cut could happen in May or June of this year.

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