By Kathleen Brooks, research director at XTB

Inflation eased in last month, and the headline rate dropped to 2.8% from 3% at the start of the year. The core rate of CPI also moderated to 3.5% from 3.7%. The key service sector price index remained stubbornly fixed at 5%, dashing hopes that service prices might retreat to below this level.

The moderation in headline inflation partly reverses the jump in price growth in January, but it is still above the 2.5% rate from December, and the decline to 1.7% back in  September 2024 looks like a distant memory.

Women’s clothing prices were the biggest driver for the fall in price growth last month, while the price of alcohol rose slightly. There continues to be a gap between goods prices and service prices. Service price growth remains robust at 5% a year, compared to the CPI goods index, which slowed further in February to 0.8% from 1% at the start of the year.

The monthly rate of price growth was less than expected at 0.4%, vs. 0.5%, however, this suggests that price growth in the UK remains an issue that could hinder BOE rate cuts.

A mild reaction to CPI

The market reaction to this data has been minimal, as the focus remains on the Spring Statement later today. The pound has dropped slightly, but GBP/USD is down less than 20 pips so far on Wednesday, the bond markets are not open, but we think that UK Gilts will also have a mild reaction to this data.

The bigger test for the UK bond market will be how it reacts to the Spring Statement, in particular the growth forecasts. We expect the OBR’s forecasts, which have a history of inaccuracy, to forecast a lower rate of growth compared to the OECD forecasts, which is one of the big problems with forecasts – they are often different.  Even so, should weak OBR growth forecasts cause bond yields to spike, then the pound could come under pressure later today. 


 

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