The U.K.’s inflation rate dipped marginally to 2.8% in February, according to data released by the Office for National Statistics (ONS). This figure came in just below analysts’ forecasts, which had anticipated a rate of 2.9%. The slight decline signals some easing, though concerns remain about how long the relief may last.
Core inflation, which excludes the more volatile elements such as energy, food, alcohol, and tobacco prices, also saw a modest reduction. It dropped to 3.5% in February, compared to 3.7% in January. This suggests that while headline inflation cooled, underlying price pressures remain persistent.
In its press release, the ONS highlighted that the largest downward contribution to the monthly inflation figures came from falling clothing prices. This decline helped bring overall inflation slightly lower, providing some respite for consumers after months of high living costs. However, uncertainty about future inflation trends remains, particularly with ongoing global economic challenges.
The U.K.’s inflation rate experienced a modest drop to 2.8% in February, slightly below analyst expectations, according to the latest data from the Office for National Statistics (ONS). Economists surveyed by Reuters had forecast a 2.9% rise in the consumer price index over the 12 months to February, so the outcome reflected a slight easing of inflationary pressures.
This follows a period of fluctuating inflation rates. In January, inflation had spiked to 3%, following a lower-than-expected 2.5% in December. Despite February’s reduction, the figures suggest that inflation remains relatively high compared to recent trends, which has raised concerns about its potential trajectory in the months ahead.
Core inflation, which excludes volatile categories such as energy, food, alcohol, and tobacco, also recorded a slight decline. It fell to 3.5% in February, down from 3.7% in January, indicating some cooling in underlying price pressures.
The ONS noted that several factors contributed to the lower inflation rate. “The slowing in the rate into February 2025 reflected downward contributions from four divisions and upward contributions from five divisions. The largest downward contributions came from clothing and footwear, housing and household services, and recreation and culture,” the agency said.
Following the release of the inflation data, the pound slipped 0.1% against the U.S. dollar, reaching 1.2925, reflecting some market reaction to the report’s findings. Despite this modest decline in inflation, uncertainty remains about the long-term outlook, particularly given the continued volatility in certain economic sectors.
The latest inflation figures are likely to prompt further discussion within the Bank of England (BoE). The central bank recently opted to hold interest rates steady at 4.5% during its latest monetary policy meeting, amid ongoing challenges facing the U.K. economy. With uncertainties surrounding global trade policies, potential tariffs, and predictions of a temporary inflation rise alongside stagnating domestic growth, the BoE’s outlook remains cautious.
In its statement, the Bank acknowledged the growing unease over international trade. It noted, “Global trade policy uncertainty has intensified, and the United States has made a range of tariff announcements, to which some governments have responded.” The BoE also highlighted increased geopolitical tensions and a rise in global financial market volatility as additional factors affecting its decision-making process.
Earlier in February, the BoE had warned of a likely spike in inflation later this year. It projected that inflation could temporarily climb to 3.7% by the third quarter due to rising energy costs. This inflationary pressure, coupled with slower economic momentum, has led the Bank to revise its 2025 growth forecast for the U.K., cutting it in half to just 0.75%.
As these challenges persist, the latest inflation dip may offer some temporary relief, though broader concerns about the economy’s long-term trajectory remain unresolved.
Slowdown a ‘red herring’
The latest inflation data will be under close scrutiny by the British government as Finance Minister Rachel Reeves prepares to address lawmakers later on Wednesday. She is expected to outline updates on the nation’s spending, taxation plans, and economic outlook.
Reports indicate that Reeves may announce billions of pounds in spending cuts aimed at addressing a budget shortfall. This deficit has largely been attributed to rising borrowing costs since her initial fiscal plan was released last autumn. The finance minister remains committed to her “fiscal rules,” which include ensuring that day-to-day government spending is covered by tax revenues and that public debt decreases as a share of economic output by 2029-30.
Reeves’ Spring Statement is set to be presented to Parliament at approximately 12:30 p.m. London time. Her announcement will coincide with updated economic forecasts from the Office for Budget Responsibility (OBR), an independent body that monitors public finances.
The OBR is expected to lower the U.K.’s growth forecasts for 2025, potentially halving its previous estimate of 2%. This downgraded outlook, combined with reduced economic output, may further increase the government’s borrowing needs. To mitigate this, Reeves might be forced to slash public spending by an estimated £10 billion.
Reacting to the inflation data release, Chief Secretary to the Treasury Darren Jones reiterated that the government’s top priority remains stimulating growth to improve living standards and securing economic stability amid global challenges. According to Jones, this approach is intended to safeguard people’s finances in what he described as a “changing world.”
Despite the temporary drop in inflation, not everyone is optimistic. Paul Dales, chief U.K. economist at Capital Economics, suggested that the dip from 3.0% in January to 2.8% in February may not provide much comfort to either the Bank of England (BoE) or the Chancellor. He cautioned that inflation is expected to climb again, possibly reaching over 3% by April and as high as 3.5% by September.
Dales warned that this potential inflation spike, combined with rising wage pressures, may force the Bank of England to delay any interest rate cuts in the near future. “If that were to prompt a further rise in market rate expectations, today may not be the only time this year the Chancellor has to tighten fiscal policy to compensate for higher borrowing costs,” he added.
While Dales predicted that inflation might temporarily fall to around 2.5% in March, he believes this reprieve will be short-lived. Rising energy costs could drive inflation back up later in the year, peaking at 3.5% by September.
He also suggested that inflation could begin to stabilise in 2026, eventually dropping to the Bank’s 2% target. This, in turn, could allow interest rates to be reduced from the current 4.5% to around 3.5% in the longer term. However, in the meantime, both the BoE and the government may have little room for manoeuvre as they navigate the complex dynamics of inflation, borrowing costs, and economic growth.
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